Good afternoon. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 '18 Caleres Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. Thank you. Ms. Peggy Reilly Tharp, you may begin your conference.

Thank you, Katherine. Good afternoon. I'm Peggy Reilly Tharp, Vice President of Investor Relations for Caleres, and I'd like to thank you for joining our second quarter 2018 earnings call and Webcast. A press release with detailed financial tables and slides are both available at caleres.com. Please be aware, today's discussion contains forward-looking statements, which are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors including, but not limited to, the factors disclosed in the Company's Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors which could impact forward-looking statements. Copies of these reports are available online. The Company undertakes no obligation to update any information discussed in this call at any time. Joining the call today are Diane Sullivan, CEO, President, and Chairman; and Ken Hannah, Chief Financial Officer. And I would now like to turn the call over to Diane.

Thanks, Peggy, and good afternoon everyone, and thanks for joining us today to talk about our results. We are going to follow a similar format like we do most quarters, while I will give you a review of the overall business and strategy, and then Ken will follow-up with more details around the financials and talk a little bit about guidance. And then, we will finish with Q&A. So let me start by sharing a few highlights. For the second quarter, we delivered adjusted earnings per share of $0.59, up 23% in line with expectations and consistent with our guidance for 2018. We reported record second quarter sales on a consolidated basis for both Famous Footwear and the brand portfolio, in addition to record second quarter operating earnings at Famous. We remained on track to deliver our seventh consecutive year of positive back-to-school comp sales and we continue to grow the top brands in our brand portfolio and take consumer share in the market. We also maintained our strong balance sheet, cash flow, and return on invested capital. And as always, we have continued to execute our strategy and invest in the business. So let's review our performance at Famous, where record second quarter sales of $430 million were up 6.1% and driven by lifestyle athletic styles and sandals. Same-store sales at Famous were up 2.6% in the quarter and we saw improvements in traffic, conversions, and pairs per transaction. Ecommerce related sales improved in the quarter as well and represented 10% of total sales, up about 15% of the solid base. Without a doubt, women's was the highlight of the quarter with comp sales at mid-single digits. Women’s sandals also comped at mid-single digits with strong consumer interest in footbed styles that we have all heard very much about.…

Thank you, Diane, and good afternoon, everyone. For the second quarter, we delivered adjusted diluted earnings per share of $0.59, up 23% over the prior year. Reported earnings per share was $0.55, and included $0.04 per share for the previously announced transition of Allen Edmonds merchandising marketing and ecommerce team to St. Louis, and for the purchase accounting costs associated with the acquisition of Blowfish Malibu. Through the first half of the year, adjusted diluted earnings per share of $1.02 were up 15.9% year-over-year, consistent with our fiscal 2018 earnings per share guidance calling for growth of 11% to 16%. Consolidated sales for the second quarter of $706.6 million were up 4.4% versus the prior year. At Famous Footwear, comp sales were 2.6% in the second quarter and total Famous sales of $429.5 million were up 6.1%.This amount included approximately $20 million for one week of sales which shifted into the second quarter of this year versus the third quarter of last year. As a result of actively managing our store portfolio, we operated 47 fewer doors year-over-year. For our brand portfolio, second quarter sales of $277.1 million were up approximately 2% in total and up more than 4% excluding the planned reduction in sales to the mass channel. Year-to-date, 2018 consolidated sales of $1.3 billion were up 2.3% versus 2017. Famous Footwear first half sales of $792.9 million were up 2.8% in total year-over-year, driven by strong ecommerce growth offset by fewer stores. Our same-store sales at Famous were up 1% in line with our annual guidance. For brand portfolio, sales of $545.9 million were 1.6% ahead of the first half of 2017, driven primarily by our Sam Edelman and Naturalizer brands. Let's turn to gross profit, which came in at $293.1 million in the second quarter, up 2%…

Well, I think we will go to Q&A. How is that [indiscernible].

All right. There you go.

All right.

[Operator Instructions] And we will take our first question from the line of Rick Patel with Needham & Company.

Thank you. Good afternoon, everyone.

Good afternoon.

Hoping you could talk about the outlook for kids at Famous, as we think about the merchandising enhancements that are underway, any details on where the most work needs to be done and the timing of when you expect that part of the business to turnaround? And I’m sorry if I missed it, but can you talk about the performance of men's at Famous as well?

Yes, sure. Let me start with your kids’ question first. And -- the kids’ business just we -- actually, we just signed a new DMM kids, a woman named Liz Robertson, who has been with our team for a while. We are really happy to promote her, and she and Colin and Molly are beginning to take a look at what we're -- what we need to do in the kids’ business, and it’s primarily work with around -- the performance segment of our business is pretty good. The non-athletic side of it was a little bit weaker, and we basically are doing everything we need -- that we can do to change that assortment as quickly as possible and make sure we put better products and great products in front of the consumer. So the expectation around the time period, I would think is a quarter or two. And I fully expect that we will be back into positive comp territory in no time. On that, as it relates to the men's business, our men's business was good on the athletic side and basically flat on our non-athletic side. Again, as I mentioned on the call, our big news and the strongest point across all of our merchandise categories was really women's virtually and in every aspect with the exception of maybe performance athletics, but the lifestyle athletic really was able to replace any of the lost business there. So, generally speaking, we feel like within a couple of quarters we will certainly have that kids business back on track, if not sooner, we will see.

That’s helpful. Can you also talk about buy online pick up in store. I believe it launched in June '17, but Famous didn't really count these abilities until earlier this year. As you make this into a greater focus, I’m just curious how customers are responding and whether you see this as a needle mover?

Yes, we do. We think it is. Consumers absolutely love it. I think I mentioned in the script, we actually had shipped close to half a million pairs of shoes from our stores just in this quarter, which ultimately gives us the opportunity obviously to get the customer back into the store and sell them on other items, and we’re currently in the process of really figuring out how we track and measure that even better than we are today. And then with the growth in ecommerce and people wanting to shop online, we think that -- and the cost actually, it's servicing the consumer. We think this actually is going to continue to be an advantage for us. So we like it and you’re going to see and hear more of it from us going forward.

And one more, if I may, on the brand portfolio. I was hoping you could talk about the outlook for drop shipping. So, I think that’s been a pretty terrific area in terms of your performance. I’m just curious what percentage of the assortment that touches right now and whether you have a long-term target? And as that does get bigger, what does that imply to the economics of the brand portfolio?

Yes. I think, in general, what we are really trying to make sure we do is allow that a consumer to find our brands in whatever way and shop for brands in whatever way that they can. So whether it's drop ship, whether we are selling that, selling our brands on others.com, our own.coms in-store, I mean it's really kind of a whole basket of opportunities. We have seen just tremendous growth in terms of drop ship. We had almost 40% growth in that segment of our business this last quarter. Total direct to consumer for us now is close to 28% of our total business, that's what it looked like in the quarter. So, all the work that we're doing in our distribution centers and the investments that we're making as you heard me mention and as Ken spoke about in his remarks as well, those are absolutely essential and critical capabilities that if we want to continue to grow and service the customer, the way they want and need to be serviced, we are going to have to do that, so I think that’s only going to get – going to get to be a bigger and bigger piece of our total business. Many retailers today as you know, they’re seeing upward to 40% to 50% of their business coming from online and we’re going to have to continue to figure out how we flow with the way the customer wants to buy shoes. So we think we’re in a good position on that, Rick.

Thank you. All the best for back-to-school.

Thanks.

Your next question comes from the line of Steve Marotta with CLK Associates.

Diane and Ken, good evening. Diane, do you want to comment a little bit on the third quarter to date comps?

Sure. We are seeing comps right in the same range that we saw in the second quarter, Steve.

Okay.

So very similar.

Okay. And besides the retro look, which I assume is spilled over into the third quarter as well strengthened that, can you talk a little bit about other categories which are outperforming, and maybe a category or two that’s underperforming?

I would say the trends that we've seen in the second quarter have continued all the way through back-to-school, so not a whole lot of new news there. I would say that we are also seeing some good early reads on booties, in particular. So we’re hopeful that boots and booties into the fall selling season will be good. Sandal sales continued as you heard, those -- I mean, we typically, what, call them seasonal categories. We don't really think about them that way anymore. They are in many ways year-around categories. So we think that there’s opportunities on both sides of the equation for us. So good reads on boots. Sandals continue to sell, slowing down a little bit now. But after this weekend, I don't know where you are, but it was hot and our -- and sandal sales continued. So -- and other than that, pretty much the same trends that we’ve seen, Steve.

Sure. Given your comments on investments and automation, can you remind where guidance is this year on CapEx? And I know you’re not giving guidance next year, but you mentioned that this automation investment will be spilling over -- for the next 12 to 18 months or so. Can you talk a little bit about what CapEx could be next year in light of those investments?

Yes, sure. Ken, do you manage to …?

yes, our CapEx guidance for 2018 was approximately $50 million. And so that had contemplated some of the initial investments into the distribution centers. And as we look into the next couple of years, I think we will be able to balance that investment in the distribution center with some of the store opening numbers that we have had historically. So, we wouldn't expect that number to differ by too much. If you recall back in when we were doing the modernization of Lebanon, I think we had taken that traditional 50 number and taken it up I think 60 to 70. And so that was back when we were opening approximately 50 stores a year at Famous. So that number now -- their opening this year is 20 and -- so we wouldn’t expect the number to differ a whole lot from the 50 that we’ve in the '18 guidance.

Okay. That’s helpful. Last question, can you mention that there's a $20 million headwind in the third quarter associated with that calendar shift at Famous. Was it -- is it $20 million just for that or is it $20 million or is Famous expected to be down $20 million on an absolute basis.

Just the 20 associated with the shift from the third into the second.

Got you. I just want the clarity on that. [Indiscernible]. Thank you so much.

Thanks, Steve.

Nice deal.

Your next question comes from the line of Chris Svezia with Wedbush.

Good afternoon, everyone. Thanks for taking my questions. Just first -- just on the cadence of comp in second quarter for Famous. Could you just maybe walk through that, how that played out May, June, July?

Yes, it -- Hi, Chris. May was mid single digits and June and July were low single digits.

Okay. Were June and July any different between the two of them, or they’re both pretty comfortable?

No, it's pretty close. Actually it was pretty close all in. The weeks, obviously, lots of variations by week, but total very similar.

Okay. And can you remind us what you’re up against is going into Q3 as the cadence unfolds August, September, October?

Sure. I can. Let's say, up to 6 in August, down 0.7 in September, and down 25 in October.

Okay.

So all in, up .9 in the third quarter.

Okay. Okay, got it. What about the Famous Footwear, the 170 basis point gross margin pressure, how much of that is just related to the extra week and the bells [ph] are moving in. And can you just give some idea what the underlying gross margin looks like and how that maybe changes as you go into Q3? That’s what I’m trying to get at.

Yes, on the 170, about a 100 of it -- a little over 100 is tied to that $20 million that shifts out of Q3 into Q2. And then the rest is really just the incremental growth in the ecommerce related sales. I think the Famous footwear.com site sales were up almost 30%. So obviously, with that the shipping is up coming out of there and has an impact back through to the actual gross margin rate. And then, obviously we made that up in SG&A dollars to deliver a pretty solid operating margin.

Okay. Would you -- so would you expect the recent event of gross margin would not improve in Q3, or is that still a shipping headwind with some of the pressure on that Famous Footwear gross margin.

Well, the -- when you say improve, you’re talking about Q3 year-over-year for Q3 to Q2, year-over-year.

Yes, we would still expect that to be up year-over-year. As you take off you don’t have the pressure of the week like we did in the second quarter and then you’re really offsetting, it depends on the mix of the sales from ecommerce in the third quarter,

Okay. With regard to -- just want go back to your overall guidance on earnings for the year, up 11% to 16%. You hit up 16% in the first half of the year, I think initially, you felt some of the expenses related to the fulfillment center would, maybe put a little pressure on that earnings growth, you ended up delivering something with a stronger. Anything we should think about as you go into the back half of the year, that we should be considering. Given the fact maybe I thought initially there will be stronger growth in back half of the year.

Yes, I think Diane had mentioned we do have some investments that we’re making into the elements of brand. And so a lot of that is happening in the back half. So I think what you see is obviously we’re not expecting the same level of duplicative distribution center costs, But we are planning to make some investments in the Allen Edmonds business.

Okay. So let's turn to say whatever cost you were assuming potentially now you’re with the investments going to [indiscernible] in the model or is that something new? With regards to --- I thought that was already [indiscernible] the model.

[Indiscernible] in the model.

Yes. So we fully expect that the operating margins in the brand and portfolio are higher in the second half than they were in the first half. And picking up the benefit of not having those duplicate costs and then where we’ve got the growth is where we -- when we put our plan together we had made plans to make some additional investments into the Allen Edmond brand.

And just a point of classification. When you say higher on the branded portfolio operating margins. Are you talking about year-over-year, not I mean, sequentially, it's obvious because that always happen. Well, I’m just curious you talk about that year-over-year.

Yes.

Okay. And sequentially, but yes.

Okay. Final thing, just Diane -- just on the wholesale on the branded portfolio. Maybe just give a little more color about the growth in those brands? Talk about gaining market share, I just wonder maybe can just walk through a little more highlights, specifically, what grew, what didn't grow and why?

Yes. The good news Chris was that you know virtually all but two grew. So let met talk about the ones that did. I mentioned both Sam and Naturalizer. They grew very nicely in the quarter. And they grew and they grew market share in the quarter. In addition, so did Franco Sarto, so did LifeStride, so did Scholl's, as well as almost every other brand in the portfolio with the exception of what I spoke to, which I highlighted the Vince business as we are beginning to follow the distribution strategy that the brand has that's meant that we've had to shift some of our business around, so that had a little bit of a negative impact in the quarter. And that’s really been the only -- the only two that we're challenged and in the quarter. For the rest of it has been pretty strong standouts. And what we try to do too is not all things are created equal, right. There is -- those top five brands that I mentioned have the -- are the most meaningful, right. They’re in essence our lead assets. So those are the ones that we really want to make sure that we continue to drive and get the growth there. So we're very focused on that and really happy to see that we were able to deliver that.

Okay. Sounds good. All the best into the fall selling season.

Thanks, Chris.

Your next question comes from the line of Laura Champine with Loop Capital.

Hi. Thanks for taking my question. It's really about the Famous part of the business. It looks like there's an expectation for gross margin reversal as we move through the back half of the year. Could you add some color to what will be driving that?

Yes, I mean, most of that is not having the same levels of distribution center expense in the back half and that's what most of it is. There is just seasonal typically year-over-year the back half margins are higher than the first half in that segment in total. But for the most part, its eliminating the duplicative expense.

And then, secondly, on the shifts happening with distribution and sales generally with Vince, how long would you expect the issues that you’re facing there to persist?

Well, basically the partnership there is that, it's Nordstrom and Neiman as well as their own stores and some other independents that they’re really selling the apparel in. And so I would expect that it will be a quarter or two and then it will level off. So it's really that we’ve had expanded distribution outside of that. So we're kind of following their lead on that. They really felt that, that was the way to improve the overall profitability to the brand and stay focused on a specific set of consumer. So we’re following along with them on that. So we will see.

Got it. Thank you.

Yes.

Your next question comes from the line of Laurent Vasilescu from Macquarie.

Good afternoon. Thanks for taking my questions. I was wondering if you can give a little bit more color around the rationale, the decision-making around the acquisition of Blowfish Malibu. Could this possibly lead to a larger sandal business? And how should we think about earnings contributions for next year since it's unnegotiable for this year?

Yes. Sure, Laurent. Hi, its Diane. With respect to the decision around it, again we had -- we really had good visibility about how that brand was performing, obviously not only through all the normal channels, but again first hand [ph] with our Famous Footwear folks. And one of the gaps in our portfolio was really the Sneaker in California lifestyle a little more casual as well as more of a millennial kind of consumer. So we thought that was an obvious opportunity for us. And again, it has been growing pretty nicely and talented people there with the need for a little more infrastructure, a little more help with some of their growth strategies and growth plan. So it really seem to be a really nice opportunity to tuck in what is right now a relatively small business. But we expect that it certainly in the near-term, in the next couple of years could double. And as we continue to look at how we evolve our portfolio, as we own that brand, so if we wanted to manage some of the brands that we license, the operating margin and return on something like that would be really nice not to mention the fact that it was reaching a new consumer and it does skew a little bit towards spring versus fall, and very much of a brand portfolio skews a little bit towards the back half, so that was the additional help in making the decision to. So that was pretty much some of the rationale and Ken will speak to kind of what you should expect in terms of its earnings impact in the near-term.

Yes, there's a little bit more detail around coming out in the Q, but what you'll see is a business that you can see on our cash flow statement this quarter. We paid a little less than $20 million for a majority share and we would expect that it would be a couple pennies accretive going into next year. And as Diane mentioned, it's a big spring business and the teams are doing a lot to grow their fall business to make it a year round business. But we are very excited about it and happy that in the first year it will be accretive to earnings. And as we give our guidance for next year, we will lay out a little bit more detail around that.

Very helpful. Thank you very much. And then, I don’t think, Molly is on the call today, but maybe you can talk a little bit about the vision to drive consumer engagement, store productivity on the channel initiatives under her leadership at Famous Footwear?

Yes. Well, I would rather have her do that when she has a shot, Laurent. But I would say here is -- she spent -- made sure that she spent her first 90 days or so with the teams out visiting stores, meeting with vendors, looking at the marketplace, looking at the landscape, making sure she had a really good understanding of what our opportunities where, our strength and our weaknesses and make sure she got a really good foundation. And it was such a terrific time to come in during back-to-school as well because it's sort of our peak -- one of our peak selling time, so it was great for her to see all of those things in action. I mean, her she is terrific in the sense that her bias is very much about consumer, consumer engagement. Looking at everything from a consumer lens coming from Disney as you can imagine and it's about the experience. So we’re hoping that in the next -- certainly within the next six months that what we would love to do is to have another Investor Day, we think that's time. And that would be a wonderful moment to have her -- have the opportunity to sort of lay out her perspective of what the business is going to look like in the next couple of years. So we’re excited about it, thrilled so far. The team seems to be working really well together, which you always worry about, making sure that the cultural fit, everything is works well. And the early indications are that the team's happy and she's happy. So we're going to start to accelerate our plans.

Okay. Very helpful. And then, the last two maybe, more short-term questions. I’m sorry, if I missed this, but could you quantify the -- how August did and then -- at Famous Footwear? And then, any thoughts around the boot category for the second half would be helpful.

Yes, sure. We -- I mentioned that August, comping roughly the same as what our second quarter did. So very much -- very typical to what that is. And our boot category is off to a nice start. We had planned for it to be -- actually, through a kickoff, a little bit later in September than we did last year and sort of glad we did that because clearly, the weather has been very warm and sandal selling has been great, but the early reads on boots are good. I think we planned it flat. I'm pretty sure that we will do better than that this year. The bootie category, in particular, we're getting very nice early reads on that both at Famous and actually with our brand portfolio. So, should -- we're keeping our fingers crossed, we think it should be a great fall season.

Great to hear and best of luck.

Thanks.

Thanks, Laurent.

Your last question comes from the line of Sam Poser with Susquehanna.

Good afternoon. Thanks for taking my question everybody. A few questions. How many stores are you closing this year at Famous now? And how -- and you said you had opened 20. How many are you closing?

Yes, opening 20 and closing 70.

And how does that -- can you tell us what happened in the quarter and how you see that flowing for the balance of the year?

Yes, we are down -- year-over-year we're down I think 47 stores year-over-year and then we see that accelerate after the back-to-school assuming we don't get any improvements in any rent deals or anything, but that’s the plan.

Let me rephrase. How many stores did you open and closed in Q2? And then -- how does that look in Q3 and Q4 right now?

In the quarter we opened 4 and closed 9. In the first half we opened 6 and closed 24.

And then in Q3?

So that it in Q3, I think we’ve got like 10 openings and then plan at -- post back-to-school would be to close the remaining stores.

You foresee that happening more in the fourth quarter than the third, however?

It is split evenly between the third and fourth right now. That’s the way we planned it.

Well around 23 a quarter, give or take. Okay. Let me ask you a couple of more. Did you have enough sandal -- this footbed sandals to get you through or is this something where there would be an opportunity going forward?

Definitely an opportunity going forward, Sam.

And then we didn't understand what you said about direct or the drop ship. The 28% -- I just want to clarify what you said there about 28% of your business was direct. Does that mean …?

Yes, 28% of our brand portfolio business was through some form of ecommerce or .com business.

Yours or -- yours and your partners?

Total. Ours and our partners.

Got you. And then lastly on Edmonds. What was -- was Allen Edmonds up in the quarter year-over-year?

Let me look. They were up to six in the comps. I think they were roughly flat brick-and-mortar, up a little over 20 on ecommerce and they’re pulling the numbers for me. And then down a little -- down in wholesale, which has been one of -- that that's been certainly happening for a while. We spent in the stores cleaning out a lot of our non-shoe categories of business. So we were moving through all that as we were getting ready for our launch here in the third quarter for new products coming in -- into the store. So, great shipping comps, not so great in wholesale.

So, I mean, we -- I noticed on your Web site, I mean, there was lot of banner promotions for footwear going on, seasonal and some regular stuff.

Right. Yes.

Is that to cleanup or I mean, there were some new products on the clearance. So how do you balance sort of your average selling prices here? How you’re going to relaunch when you’ve been very promotional for quite some time?

Yes. We certainly had been and that was something that we've been trying to work our way through to -- I don’t know how I -- I talked about the clutch and gas, right, that you have to figure out, how you’re going to continue to drive your top line and clean out some of the goods, but make sure you’re delivering some earnings along the way with all of this. So it's been a little bit of a -- it's been a little bit of a challenge doing some of that. We needed to reduce the amount of promotional activity for sure, not only for our own stores and online, but also for our wholesale partners. So that’s the work really of this entire rebranding effort, new product is to make sure we have enough new products that’s focused on certain channels of distribution. That is going to be non-promotional that has mapped pricing around it. And in addition to that, we needed to make sure that we continue to offer different kinds of products in our stores, different experience not only great new footwear collections, but also new collection through that artisans of freedom group that they -- that Malcolm has pull together, which is -- looks like it's going to be really, really interesting. We got something like 6 to 10 different collaborations that will be going on for the next 6 to 12 months. And it's all from American-made products from different companies across the U.S here that are making men's accessories and new categories. So we think that's going to be a really nice way to begin to tell really fresh story to the consumer. And then, as I mentioned, driving some new TV directly to the consumer, so we can bring -- keep bringing in new consumers into the franchise and which will allow us to not be relying on the same customers that we have, but actually broaden the customer base and had a chance to see one of the spots I think late last week, and I was surprised to see a guy named Baker Mayfield making a little appearance in one of those ad, so it'll be interesting to see as we keep focusing on our core customer and figure out -- continue to figure out how to broaden it and really become that better American luxury brand. So it's a work in progress and I think this fall will be the start of our ability to really begin to reduce those promotions and build -- rebuild our wholesale business.

I have two more questions. One for you just the follow up. What’s the split of wholesale and direct for Allen Edmonds? And secondly for, Ken, do you foresee in Q3 earnings being up or earnings going to be down because of the shift?

It's about 90% direct at Allen Edmonds. The wholesale is a fairly small portion of our total business, Sam. And Ken's looking up.

Yes, are you talking about Famous, specifically?

No, I’m talking about earnings overall. Do you expect earnings overall to be up in the quarter or down, because I mean, Famous is a good chunk of them anyway. So …

Yes, we’re expecting earnings to be up in the quarter in total. They will be down in Famous with the $20 million shifting out, but we respect the total company to be up.

And do you expect total revenue to be up with Famous's $20 million in the store closings -- with those net store closings or not? I mean, that’s …

Slightly. Yes, it's …

Total corp -- company revenue is going to be up slightly. Famous's revenue likely be down though, correct?

Famous will be down, yes.

Okay. All right. Thank you guys very much and good luck. Thanks.

Thanks, Sam.

Thanks, Sam.

And there are no further questions at this time. I would like to turn the call back over to Diane.

Thanks very much. And again, I would like to thank everyone for joining us as we delivered a record-setting second quarter. There's a lot to look forward to as we drive towards our seventh consecutive year of positive back-to-school comp sales, as we continue to take market share in our brand portfolio, and as we look to deliver another year of double-digit adjusted EPS growth. Thanks again. Talk soon.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.