Good morning. My name is Allison Malkin, and I'm a partner at ICR. I have the pleasure of moderating a Fireside Chat for Caleres. Caleres is a premier global footwear company, home to a powerful portfolio of brands and the family footwear chain, Famous Footwear, with over 1,000 locations. Over the past several years, the company has transformed its business model, allowing it to achieve higher profitability and future growth. This effort has increased its earnings potential. In fact, yesterday, the company pre-announced, actually, pre-affirmed, reaffirmed its guidance in a press release, marking its third consecutive year of reporting earnings over $4 a share. Here with us to share the company's strategy are President and CEO Jay Schmidt and CFO Jack Calandra. Thanks for being with us today.
Thanks for having us, Allison.
Sure. So, Jay, let's start with just checking in on the state of the consumer. I know this past holiday season, there's a lot of skepticism over the period, yet you reaffirmed your guidance yesterday. How has the quarter progressed so far?
So I think we saw, you know, a little bit of a, say, mixed performance, from our segments as we moved into fourth quarter, and probably continued volatility, that continued from third. When I'm looking at the two segments here, Famous, we saw really, some softness into November. The Famous consumer as a family, I think, is continuing to prioritize their spend in different ways, and, fortunately for us, they're continuing to prioritize kids' spending, which has been a standout for us the entire year. And continuing to focus on the brands and styles that they really desired from our, our lead brands there. Going over to our branded portfolio, we saw that, the business, worked a little more consistently, I would say.
We still saw a couple peaks and valleys, but overall, consumer continuing to prioritize newness and, you know, our four lead brands were driving that. That is Sam Edelman, Allen Edmonds, Naturalizer, and Vionic. And I would say, you know, our Brand Portfolio really works very well at a period like this, and as you saw from our, guidance, that we continued... that we really, we work well in, you know, places where there really are some headwinds as well as some tailwinds, and our ability to maneuver and pivot, I think, is very much an asset for us.
That's great. You always mention, or you frequently mention, that market share gains are an important metric for the company. What do you attribute your market share gains to? And why is this an important barometer for the health of the business?
Well, I think, we've always looked at it, and we, you know, we're competitive by nature, but I also like to just see how we're doing in a landscape, and it's one of many metrics that we do look at. I think for 2023, it was very important that we, as we were prioritizing profit over sales, but yet we're still picking up market share. It feels like we've been making the right decisions, and I think that's allowed us to have, a better performance, than possibly others. When I look at it, our lead brand strength continues to gain market share, and that's worked very well for us in the Brand Portfolio.
We continue to pick up in the women's fashion footwear segment, and then over on the Famous Footwear side, with our strength in kids and really moving that, we picked up not only just kids' market share, but total market share in shoe chains. And I think, you know, as we come into this new normal period, this idea of continuing to look at both segments of both profit and market share is important. And then, let's say, as we go through into, you know, next year, we're looking at overall, there's gonna be a period of, you know, low growth. So I think we're currently positioned to really be in an outperform place, where we should be able to continue to take share, and that's a key part of the investment strategy that we laid out during our investor day.
Nice. And then, as part of the answer to the first question that I asked you, you mentioned the ability to pivot. So obviously, speed is really important as a differentiator to your business. Can you discuss your speed initiatives and how you are benefiting from those?
Yes. So our speed initiatives are. First of all, we launched a program in 2017, and so we've really been developing this capability over time. It obviously took a hiatus during the pandemic, when speed was really not the key driver there. It was just trying to get product into the country. But in looking at it now, our speed program on our Brand Portfolio, it starts with really having great brands with great product coming through at the beginning and brands that matter to consumers. But in looking through our go-to-market, we're really trying to deliver product early, get that early read, and then come back into our key key styles, and more importantly, even key SKUs right now, within a 90-day period, and so that's been an accelerant to our business. I'm giving you the outside time.
We've actually had quicker performance, and that assumes a ocean freight piece of it. What does that have to do on our, as we look at our sourcing model? Well, you have to have great factory partners that actually are you're working with them, forecasting well, having space for it. You have to have materials ready and components on key products, so a lot of planning going through this. And then you also have to just move very, very quickly. The thing that's unique, I think, about the Caleres speed to market piece of the business is that we do it across a wide portfolio of brands, brands like Veronica Beard, all the way down to Naturalizer and LifeStride, and we deliver that all with the same quality of the original.
So while the consumer is throwing everyone a lot of headwinds, or a lot of curveballs, I should say, we're really coming back and getting into this in a very quick time, and those quick pivots have allowed us, I think, to change things. As we've really, you know, we reported in our third quarter earnings release, speed production represented 28% of our production during third quarter, and that was against 12% a year ago, and that pivot outside of, like, boots into more categories that were working will continue to help us as we move through the fourth quarter. And I think it allowed us to really avoid some of the boot headwinds that were out there and really getting back into fashion sneakers, ballet flats, and all of the key items that the consumer was affording.
The benefits from this are also great on the margin side, because as we come back and make fewer, bigger bets into bigger items, we obviously have some more margin opportunity there, but also, we have fewer markdowns and allowances because the product is exactly what the consumer is looking for. So I think I just say it's the most consumer-driven concept, and it. I think it has never been more important, with the volatility that's in the marketplace, but also this desire to really get back in and really maximize things in season versus waiting to future seasons.
Great. Thank you. That's really helpful. Jack, I didn't forget about you. In terms of inventory, you know the company has such a unique perspective because it manages both a retail business and a wholesale business. Can you talk about how you're managing inventory, both the wholesale and the brand side, how you're thinking about the evolution of industry-wide inventory environment as we move into 2024? Do you expect to see some normalization in inventory trend?
Yeah. Thanks, Allison. So, in terms of inventory, we finished the third quarter with our inventory on a consolidated basis, down 14%. That was down 2% in Famous and down 27% in Brand Portfolio. And obviously, that decline in Brand Portfolio was in part because of what we were anniversarying in terms of those supply chain disruptions. That said, the inventory quality that we had in both those segments was better than the prior year, as the percent of aged inventory to total was lower in both Famous and in Brand Portfolio. I would say that, and Jay talked to some of these things, the things that we've put in place over the past few years have enabled us to manage our inventory in a much more efficient way.
So the Edit to Win initiative, where we're taking bigger bets on fewer SKUs. The Speed Program, which obviously turns faster and reduces the risk of markdowns. And then we've got a very rigorous open-to-buy process, where we continue to look for improved turns across all of our businesses as we think there's still opportunity there. As we look towards the end of the year, we'll start to see some of that normalization take place. We think our inventory on a consolidated basis will be down low to mid-single digits at the end of the year. We think that sets us up really well for next year's plan, again, as we look for improved turns in the business.
Thanks. And then, Jay, back to you. Can you talk about the investments in Famous Footwear, how you're positioning the brand and the business as a destination for the millennial family?
Yeah. So really our, you know, our first and foremost piece is to get all of the right product, the brands, the styles that this millennial family is really focusing on, with our target being Christina, our millennial mom, and then certainly that works so well because of our kids' positioning. But as we've seen time and time again, brands that work really well across women's, men's, and kids, they grow much faster, and they go further. So that's a start focus for us 'cause, you know, we have a smaller footprint, and so that curation really has to be more and more important. So that is certainly top of mind.
On an experience level, we've opened some Flair stores, which is our term for really our new format that we really are trying to roll out in a more significant way as we go forward. If you think about it, Flair really involves us really as an area to show off brands that matter, trends that matter, have a much more exciting and engaging environment in the store, and it's really an outside in, inside out focus. So we're really putting it as places where we really show up well and can change the way people see it. We've had some really interesting feelings, like some if you think about how an open-sale environment is created, it's really every shoe looks equal.
And so now with this new format, we're really able to showcase the pieces that really matter and also flip the floors more often, so it really feels like that. We're really tying in our whole marketing investment and our website as an interactive piece with that, and then I would say as we continue to go forward, we'll see and bring newer products into those stores in a more elevated way. There is a measurable lift that we found in sales comp versus the market area, so we're excited about that. We're really planning to open 30 more this year and really getting to a place where it's a little under 200 stores out of our chain. So this idea of making some of our best and most important locations go is really being important.
We've learned a lot through this process here, and really opening in places where the consumer really can see us, from the outside in. We're focusing on larger footprint stores where we can make more of an impact there. And, and in general, it's been a really exciting and engaging place for us right now.
That sounds like a great growth opportunity. And then, you touched on kids, and that's been a bright spot at Famous Footwear all year long. Can you discuss what you're doing to drive the continued positive momentum in that part of your business, whether that's marketing or product, something that you're doing differently in the stores?
Well, it's currently, we feel there's continued opportunity to take more brands into the kids' place. You know, certainly our big brands that go across the kids' area, we're seeing Nike, Crocs, HEYDUDE , and others working very, very well. Some of our new launches actually are coming from Caleres. We're relaunching the Sam & Libby brand, and that will be a first at Famous this year, and that will be not only for the women's fashion piece, but also in kids' over time. And then the second part of that is that we also are launching Dr. Scholl's kids into this space, but we're continuing to work with all of our key partners to do that.
And then in addition, we're really unlocking some of the effects of, I think, our investment in the CDP, and that has allowed us to really take our targeted consumer, which is this Christina or millennial mom, and really focus our investment and our spend in really focusing on messaging that's directed toward her. So, so far, we're in the early innings of that, but I'm pretty impressed with what we've seen. First off, we've had a nice pickup in our media in terms of the efficiency. We also are seeing a nice increased velocity in our email because it is more targeted with more personalized offers for Christina and her family, and really going after the kids' piece of this.
And now we're just really trying to get all the inventory aligned so we can really make a more impactful place. But for sure, it's something that it's a strength of ours, and we're continuing to build on it in all touch points.
Great. And then, I guess in terms of, this one is for both of you, but, all throughout 2023, the priorities were really focused on driving profitability and not pushing that promotional button. So in terms of that decision to drive profitability over trying to increase sales, do you believe that that was the right approach? How has that changed as you will move into 2024, will you start to emphasize sales growth? And, and how will you, you know, maintain that nice balance of nice profitability with sales growth?
Well, I'll let Jack fill in some of the details on the plan that we outlined in Investor Day, but for sure, we are here to have growth more on our Brand Portfolio side as we've continued to see some nice momentum, particularly with our lead brands. But that profitability piece is very, very important. One of the things I'll just say that I remember you asked me what I wanted to say if I came back this year-
Mm-hmm.
And talk about it is that obviously we are above a $4 baseline. We have maintained our beat guidance, you know, for the balance this year. But then also, this is the first time in Caleres history where the Brand Portfolio is going to deliver more operating earnings dollars than Famous Footwear. And I think we said in Investor Day that we would do that someday, and that day is now. So we are here, and it's very exciting. But for sure, we're continuing to prioritize profitability. The decisions we made to get to this place are continuing to act through there, and that comes from a lot of the, I think, really hard work to elevate the brands and continue to really do the right amount of business.
So I would say we're always gonna keep trying to balance this through, but I think it's important for...
Yeah, yeah, and I would just add to Jay's comments that while we have focused on profitability this year, it hasn't come at the expense of market share growth. So we have grown market share in the shoe chain channel for Famous, and in the women's fashion footwear channel for our Brand Portfolio. So that focus on profitability hasn't come at the expense of market share growth. We've been able to do both. As we look forward, in terms of the plan we shared at Investor Day, we talked about Famous growing at about a 2% compound annual growth rate, that coming through productivity improvements as we think that the fleet is properly sized today, so not expecting unit growth there.
For that operating margin to hold flat at about 8%, it's on the Brand Portfolio side of the business where we're looking to accelerate growth-
Mm-hmm.
... particularly behind our lead brands. In that segment of the business, we're looking for more like a 7% compound annual growth, and at the same time, growing operating margins from 11%-14%, and we think we've got opportunities there.
And just, I just wanna add on top of that. Just in terms of the Brand Portfolio, which brands would you say within the portfolio are small and just ripe for greater growth potential?
Well, I think they all have a little bit of different growth opportunities as we look forward. You know, our Sam Edelman brand, we think is really poised and ready for growth. They continue to have additional opportunities with things like Sam & Libby being relaunched in the family channel is a big opportunity for them. They're having a lot of success on the international front, which is a place that we're very under-penetrated on, so that gives us additional growth. They're also seeing some growth coming out of some licensed categories, too, which is exciting.
Our Allen Edmonds business is almost all vertical, so as that brand has really come in very strong, we think there's an additional wholesale opportunity there that just getting back in and again going at it in a very profitable with key customers in a very right way, now that we have that brand firmly in place where we want it. And then, Naturalizer has continued digital growth and international growth, and Vionic, in a similar way, has both wholesale and digital growth. So we see, there are a lot of key identified opportunities, and what we're doing, Allison, is really making sure that we have the right resources against those and the right prioritization, and that's people, that's marketing, and and just making sure that we're really right on the brand product style piece of the business.
We feel really good about the progress we're making, and then as we continue to go forward, more to come.
Great. And, well, earlier in our chat, you talked about CDP, and at the recent Investor Day, you also spoke about it. Can you just speak about how the marketing and analytics ecosystem has been progressing thus far? Any early reads or successes to share?
Yeah. I think, in addition to more efficiency on media, the Famous retained consumers are up, email is more productive, and then in terms of our reward piece of our business, there is really, we're seeing really strong retention and really good engagement, particularly at Famous with our Superstar rewards piece. So the top end of our rewards piece continues to grow, which that's our very best customer segment. The good news is that as we go into 2024, all of the data has been launched for our lead brand, so that's really an exciting piece that we'll be able to see some of those same pieces learning, get more efficiency out of it, and continue to target that. And our direct business on our lead brands is amongst the most profitable in there.
So, it's a very, very important piece that we're really looking to do. So we're excited. We have a lot of consumers to work with, but we still have a lot of work to do on it, but I think it all points to more places where we can continue to grow.
Nice. And then, turning to outside of the organization, you historically, we've been acquisitive, or the company's been acquisitive. What's your current thinking on expanding your portfolio through acquisitions? Also, we've seen some other companies prune, some sell non-core assets, so I'm sure it's a nice balance that you evaluate. Would you look to sell brands? Would you look to acquire brands?
Well, I think I'll start off by saying that we at Caleres are really become very good brand managers, and the management of our portfolio is. We're in an active portfolio management piece of our business. We took a lot of really strong action during the pandemic in terms of closing four brands and dilutive retail piece to it. So I'm here to say that really the Brand Portfolio feels very good to us right now, although we always look at new opportunities on both, you know, adding, and if there's any way to make the whole thing better, we'd look at that, too. But today, I would say I'm very happy to report that we have no, no more laggards in the portfolio. They're all performing proud, and that's really reflected in the operating margins.
So I think when we looked at, really our criteria, though, and we always look, and if something became it was at the right price and it became available, I think we'd be foolish not to look at it. But for sure, the target consumer would have to fill a white space. The bar is much raised higher, so there's really... We would have to really see a very powerful and accretive brand come through. Any vertical integration opportunities are very important, and then something that has more of an international millennial focus. However, the prioritization of capital is on a different place, and I think you should refresh everyone on that as to where we're looking.
Yeah. Well, I mean, our first call on capital is to invest in the business behind the strategic priorities that we've talked about. Second is, we wanna continue to maintain the dividend that we've paid for over 100 years. Third is, we wanna continue to focus on debt reduction. We've made some really nice progress there. We're now at less than 1x trailing 12-month EBITDA on that. But at the same time, with that lower debt profile and the headroom we have on our ABL, certainly share repurchases are back within scope, if you will. And then, as Jay said, M&A, I would say, would be sort of the last on that priority list, and there's some very strict and stringent criteria for us to consider anything there.
Okay, great. Yeah, it seems like you have a lot of organic growth opportunities ahead.
Yeah.
And then we only have 30 seconds, but we've been talking about this baseline of earnings, $4 a share, and the structural changes that got us there. What gives the company confidence or you confidence that you can maintain this level and, and actually grow from there going forward?
Yeah, so I'll say, the reason we're confident is, one, they are structural changes. So we've made a number of changes, both on the operations, both in Famous and in Brand Portfolio, and then on the financial side, in terms of our debt structure and buying back of shares. And so all of those things give us the confidence that we've built that foundation, and I think the proof is in the pudding to be delivering a third year of EPS above $4. As we look forward, as I mentioned, some of the assumptions we have in our strategic plan, looking for more growth to come from our Brand Portfolio. We've got a number of really compelling strategies in terms of categories, channels, and geographies that are gonna get us there.
We're looking for about 100 basis points of operating margin improvement over that period, with the gross margin, actually, with all the puts and takes being relatively flat and getting some SG&A leverage, both through the proactive cost actions that we're taking, plus the leverage on a higher top line.
Awesome. All right, that's great. Thank you so much. I thought this was extremely helpful, and thanks for contributing to Our ICR Conference. The company has a breakout session at 1:30P.M.
Thank you, Allison.
Thank you.
Thanks.