Good afternoon. And welcome to the Caleres Second Quarter Earnings Conference Call. My name is Tawanda and I will be your conference coordinator. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to your speaker for today, Logan Bonacorsi, Vice President of Investor Relations. You may begin.

Good afternoon. I would like to thank you for joining our second quarter 2021 earnings call and webcast. A press release with detailed financial tables as well as our quarterly slide presentation are 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 US 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 on this call at any time. During today's session, unless otherwise noted, our comparisons will be primarily in relation to the second quarter of 2019. We believe this to be a more comparable time period for most of our key metrics due to the pandemic-related impacts that prevailed during the second quarter of 2020. Joining me on the call today is Diane Sullivan, Chairman and CEO; Ken Hannah, Senior Vice President and CFO; and Jay Schmidt, President. We will begin the call with brief prepared remarks and thereafter we will be happy to take your questions. I would now like to turn the call over to Diane. Diane?

Thanks, Logan. And good afternoon, everyone. I'm very excited to report that, during the second quarter, market trends that emerged in March continued to gain momentum, with consumer spending and shopping with intent. In fact, the consumers' increasing comfort with in-person interaction improved visibly around the return to work and school, and notably, their desire for new and fresh products and styles across categories powered robust demand dynamics. Our company capitalized on this terrific consumer demand and leveraged our strategic foundation, which is, of course, strengthening the power and the reach of our brands, accelerating our digital capabilities, leaning into our capabilities and operations, and then our strong team really delivered exceptional results in the quarter just ended. This builds further on the progress made earlier in the year and puts us on track to deliver record annual adjusted earnings per share of between $3.25 and $3.50. Just a few of the highlights in the second quarter. We achieved all-time record quarterly operating earnings of $62.8 million and adjusted earnings per share of $1.19. We also exceeded first quarter 2021 sales levels by $37 million. We generated significantly stronger gross margins, reaching 47.7%. And we also made noteworthy progress towards our balance sheet goals and, of course, continue to focus and engage with our consumers, driving deeper and stronger connections with all of our brands. Overall, our consolidated revenue for the second quarter was $676 million, representing a nearly 6% improvement from the first quarter of 2021. Our adjusted earnings per share for the period reached $1.19, up $0.59 sequentially and surpassing second quarter 2019 levels by $0.57 and, most notably, making the highest quarter of adjusted earnings per share in the company's history. Our gross margins also improved significantly, rising 705 basis points from the second quarter of 2019…

Thanks, Diane. And good afternoon, everyone. I would like to start by echoing Diane's comments. We delivered an outstanding second quarter, which reflects the power of our portfolio, the strength of our strategy and the dedication of our Caleres team. I'm pleased to report that in addition to another strong operating performance in the quarter just ended, we also continue to advance our efforts to reinforce our financial foundation and drive forward with the strategies intended to enhance shareholder value. As we previously discussed, our top priority for cash flow remains debt reduction and we made tremendous progress toward that objective, once again in the second quarter. In total, we paid down an additional $100 million in revolver debt during the period, another step toward our goal of zero net debt. During the course of the past five quarters, we've managed our working capital and utilized our strong cash generation to lower our overall indebtedness by $340 million, creating significant long-term value for our equity holders in the process. In addition to our revolver debt reduction, we elected to call $100 million or half of our outstanding senior secured notes on August 16. We've shifted this long-term debt to our revolving credit facility. You will see this reflected on our balance sheet at quarter-end as the current portion of long-term debt with only $100 million of long-term debt remaining. Furthermore, we've recently entered into discussions to renegotiate and renew the terms of our revolving credit facility. We expect, through these negotiations, we will extend the credit facility's maturity date by five years and restore it to pre-COVID terms. This shift and renewal, coupled with the additional revolver debt reduction, will reduce our annual interest expense by approximately $9 million. Looking ahead, we expect to close 2021 with an even stronger…

[Operator Instructions]. Our first question comes from the line of Steve Marotta with CLK Associates.

Very, very well done in the second quarter and guidance. Highest congratulations. A couple of quick questions. As it relates, Diane, to back-to-school, can you talk a little bit about, few puts and takes aside, how normal is this season on a weekly basis? Is it still skewed significantly because of the pandemic? Or is it tracking somewhat more normal in its beginning peak and tail?

Steve, I would say it's fairly normal and we've looked at it compared to 2019 and 2020 and looked at even the five-year average. It's peaking a little bit later, maybe by a week, but not much. And we are seeing a little more of a peak this season this year, I should say, than we saw last year. Last year was a little bit more of a flat line. This year, we saw a peak in really week 28, something like that. So, yes, I would say it's returned to somewhat more normal and a little bit later.

Ken, how much has been air freighted in the first half incremental to what you would normally air freight, if any, and what is embedded in the guidance for the second half?

There's been very little air freight in the first half. As we mentioned, there has been delays. Most of the delays have really been in terms of the time early in transit. And we mentioned with the Brand Portfolio inventory at the end of the second quarter, it's down 30%. We have over $100 million of that inventory that was sitting in transit. So, it was on the water, on its way. And therefore, as I tried to characterize was not available to sell. And so, to this point, we've not had a lot of air freight. We have a little bit baked in in the back half where we need to make sure we have goods available for our digital business and we're working with our suppliers to keep inventory flowing, but it's – lead times have continued to be extended for sure.

And I was just going to ask that. What is the current delay to the best you can quantify it generally?

There is two pieces to that. I'll let Jay, if he wants to give you some specifics, kind of jump in here. But there's two pieces. There is the delays on the water and that had went from 14 days to 21 days to as high as an incremental 30 days. And then, there is the delays where there is factories that have shut down for periods of time with COVID and had delayed receipts and are at capacity. So, that's on a case-by-case basis. So, I don't know, Jay, if there is anything in addition to that you want to add?

No, I think it's by case-by-case.

One last question. Just trying to think a little bit – well, it's actually twofold. As it pertains to your ordering for spring and summer deliveries next year, are you trying to pull forward goods and maybe anticipate deliveries, say, 30 or 60 or 90 days earlier? And if so, maybe you can quantify that in order to beat the rush, if you will?

It's a very good question, Steve. What I would say is that we really started several months ago to begin to add lead times to everything that we've been working on, both really on the Brand Portfolio side and again on the Famous side, making sure that they were really clear about their buys. And then, secondly, particularly on the Brand Portfolio side, Jay has done a great job of working with the teams to try to be narrowing our assortments and trying to go deeper on big items because those assortments in those breadths are really not -- we're not going to be able to build the business on that kind of breadth. We've got to get much narrower and deeper. So, we've been doing a lot of work around that. And then, really, again continuing to diversify our supplier base, not shifting too quickly in one direction, but making sure that we're shifting our supplier base and everything from who is producing our shoes as well as container resources and then continuing to make sure we do a great job to on all the consumer insights that help us make good decisions around that as well. So, there is a lot there, but you're right, it really is, when I look at where the – some of the focus challenges may come, it really may come in Q1 with Vietnam and a lot of the issues that people are experiencing out there, but that's what we're doing to mitigate that as much as we can.

One last follow-up. As it pertains to spring and summer deliveries, can you give us a little bit of look into what the order book is like right now, say, compared to 2019 at this time?

Steve, it would be hard for us to judge at this particular time. We really don't look at the order book that same way because a growing part of our business is coming on reorders and replenishment and drop ship and a lot of e-commerce piece, but we'll take a little look to see if there is an indicator there that we could get to that would give you a sense of all that.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Congratulations on the terrific results. As you saw the environment through the second quarter, any specific categories that you would call out, differing one from another? And pricing, how are you thinking your pricing going forward? Are there raw material increases that you're taking price on?

First of all, in terms of the trends and what we saw throughout the quarter, any of the iconic brands that had been performing really throughout the spring season continues to do so and the trends that you'd seen, whether it's in athletic and sport, whether it's foot bed sandals and Crocs. All of those things continue to be terrific. But what we did see at the consumer was much more comfortable and ready to go out and go to social occasions. That opened up dress and sandals and heels. Definitely, were something that the consumer demanded. And actually, I can tell you from our Sam Edelman business, we're completely out of stock in core sizes and things like the Hazel and the Yaro. So, that says to me that there is definitely some pent-up demand there. So, that would be a little bit of a sense of what we see and early reads on boots, while it's extraordinarily early, it seem to be good as well. As it relates to price increases and input costs and really all of the costs that are going up right now, yes, we have definitely taken a look at all of that and are raising prices going into the latter part of the fourth quarter and for spring of 2022. Jay, I think you could maybe comment a little bit on that in terms of what you're seeing with respect to pricing, maybe a little bit around, on average, what that might look like.

First of all, AURs, for even the brand side, were up about 8% in the second quarter, which was good, if we're going to see that, I think, build as we get into fall, really going into the 10% moat. So, that's where we're going on the AUR front and we have seen material costs go up as well. So, that's really aided toward that.

Ken, anything else on that question?

No, I think we're good.

Congratulations.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Ms. Diane Sullivan for closing remarks.

All right. Thank you...

We do have one that came up, I'm sorry. Would you like to take it?

Okay, great. Fantastic.

It's from Susan Anderson with B. Riley.

Nice job on the quarter. I guess just a follow-up on the back-to-school question, I'm kind of curious, it sounds like it's a little bit more normal, but are you still expecting it to be a little bit more drawn out versus, say, 2019 and continuing into October? And then, I'm curious, just how you're thinking about holiday too. It may be a little bit early, but as we look into holiday last year, it started very early. Are you expecting that also to be more drawn out as we saw last year?

On the back-to-school, no, I'm looking at the data here right now and I would say it's elevated, for sure, over the 2019 levels, the overall volume, but it's in a fairly similar pattern. We'll see how the next couple of weeks play out. But I would say pretty consistent with what we had expected and what we've experienced in the past. A little bit later, but not much to show yet. And then, as we look to holiday, I think it's a great question. We do think same thing that the consumer is going to be excited and thrilled again to be celebrating holidays, we hope, in a more normal way, so that the opportunity that we have during that time period should be terrific. And again, with the consistent flow of inventory and making sure we're trying to supply new items all the time, we're really hoping that we engage her and everyone in terms of looking at our assortments as fresh and new on a much more consistent basis. So, I think we're feeling overall quite good, as indicated in kind of our guidance for Famous being somewhat flat to slightly up to 2019.

I'm just curious. I like the Ryder Cup partnership for Allen Edmond. It sounds interesting. I'm curious if there has been any read on the new casual product you have out for the brand or the new updated merchandising and marketing?

Yes. I'll let Jay answer that one.

We're about two days into it. So, I think it's very short. But so far, we've seen, it's our most traffic part of our website at all and it's gotten the biggest hits of anything we've seen so far.

The Ryder Cup too.

The Ryder Cup too, yeah. And then as a specific call-out. So, we're very excited about that and we'll have more to communicate on that very soon.

And then, the casual side is up to 40%, right? Casual and sports.

And the casual, the sneaker piece is up. If I look back to 2019, it's almost triple where we were. So, as a penetration to total. So, it all feels like we're going in the really right direction there and really doing a lot of great things with the brand to change our outcome.

Well, good luck in the back half.

I'll turn the call back over to you Diane for closing remarks.

Okay, thanks so much. Thanks again for joining us on today's call and for your interest and your ongoing support. In summary, I think you can tell, for all of our comments, we really believe we're well positioned to capitalize on improving consumer sentiments and all these great new purchasing habits to finish the year in a record-breaking manner. We also believe we are poised to maintain this momentum into 2022 and beyond, given the powerful one-two punch that we have of our expenses, direct-to-consumer network, anchored by Famous Footwear, and our exceptional portfolio of value driving brands. In our view, our multifaceted platform for engaging consumers is a significant and differentiating strength, one that greatly enhances our overall value proposition. Thank you again and look forward to seeing you and on the next call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.