Good afternoon, and welcome to the Caleres Fourth Quarter Earnings Conference Call. My name is Jamaria, and I will be your conference coordinator. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I will turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Good afternoon. I'd like to thank you for joining our fourth 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 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 online. The company undertakes no obligation to update any information discussed on this call at any time. 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'll be happy to take your questions. I would now like to turn the call over to Diane. Diane?

Thank you, Logan, and good afternoon, everyone. I'm thrilled to report that Caleres delivered strong results, exceeding our expectations during the fourth quarter of 2021, capping off our best year ever. Our global workforce didn't allow the significant rebound in demand and the rapid return of the consumer to pass us by. We leveraged our strengths, leaned into our capabilities, navigated the ongoing macro challenges and strengthened our balance sheet while always keeping the consumer at the core of our focus. These tremendous efforts, coupled with our established strategies and investments resulted in a record-breaking year on effectively every financial measure. In total, we delivered adjusted operating earnings of nearly $220 million and adjusted earnings per share of $4.29, a level nearly double that of our previous annual record. In addition, we generated approximately $286 million in adjusted EBITDA. Furthermore, we highlighted our recent environmental, social and governance progress and set ambitious 2025 targets, in our inaugural ESG report, a report that was nationally recognized on Newsweek's most responsible companies list and ranked in the top 10 for the consumer goods category. We look forward to providing an update on these efforts in our next report. Overall, we exited 2021 a more agile and financially sound organization, poised to generate significant and ongoing value for our shareholders. Now let me move to some of our performance highlights from the quarter just ended. During the fourth quarter, we delivered strong fourth quarter sales generated record fourth quarter gross margin levels achieved record fourth quarter operating earnings of approximately $44 million and adjusted earnings per share of $0.91. Eliminated the remaining portion of our higher-cost long-term debt and maintained our focus on connecting with our consumers and advancing our efforts to unlock growth opportunities across the enterprise. Leading this outstanding performance was…

Thanks, Diane, and good afternoon, everyone. I'm excited about the momentum we experienced in our business during 2021. Clearly, we're focusing on maintaining this momentum, controlling the variables within our control, building on our recent success in delivering on our top priority of driving sustainable shareholder value. I'd like to start my discussion today by sharing a perspective of our outstanding results detailing our capital allocation plans and closing with our outlook for 2022. While most of my commentary will focus on the comparable period in 2019, there will be some instances where 2020 is a more relevant comparison period and will be noted as such. We delivered consolidated fourth quarter sales of $679.3 million, which was 19% above 2020 and 2.8% below the fourth quarter of 2019. As Diane mentioned, this performance was driven by Famous delivering an 8.8% increase over the fourth quarter of 2019, another quarterly record for the brand and reflecting strong increases in our brick-and-mortar business despite operating 55 fewer stores in 2021 when compared to 2019. Our brand portfolio continued to improve with fourth quarter sales increasing 24.4% compared to the fourth quarter of 2020, while declining 15.8% versus the fourth quarter of 2019 including the impact of the exited brands. Our consolidated gross margin was 43.4%, up 351 basis points from the fourth quarter of 2019, reflecting another quarter of strong margin performance at Famous Footwear. In fact, Famous Footwear delivered gross profit margin of 48.9% in the fourth quarter. This 641 basis point improvement over 2019 was driven primarily by the robust consumer demand for our brand offerings, the continuation of more full-price selling and another quarter of minimal promotional activity. Our brand portfolio recorded fourth quarter gross margin of 34%, including $11 million in incremental ocean freight. This was 100 basis…

[Operator Instructions]. Your first question will come from Steve Marotta from CL King & Associates.

Congratulations on ending the year terrifically well, very, very well done. I was wondering, just a couple of details on the guidance. Does the $3.75 to $4 for the year assume incremental share purchase. And then, Ken, maybe you can walk through the puts and takes and expectations for gross margin and SG&A through the year, not necessarily on a quarterly basis, but just the big deltas in what you would consider comparables against, say, incremental freight comparables from a channel standpoint, from an increased promotion standpoint. That's all on the gross margin line and then maybe on SG&A as well.

Steve, it's Diane. Thanks for the kind comments. And obviously, it's a team effort. Everyone across the company put a tremendous amount of time and energy into helping to deliver these results. So we thank everybody on that. And just as a quick note, in terms of the share repurchases, were not included in that guidance of $3.75 to $4. And Ken, I'll let you start walking through some of that as well, as we go along.

Yes. I think probably the easiest way to think about it, Steve, is from a gross margin standpoint, we delivered a little over 44% this year. And I think you can assume that we're going to hold that rate in the 2022 period. There's really 2 different dynamics that are going on. One is Famous had delivered 48%. We're allowing for a little bit of promotion and some investment there. So you could expect that to be a little bit lower. And then on brand portfolio, as we mentioned, we were only down 100 basis points in the fourth quarter, up against 380-or-so basis point impact from ocean freight. We don't see the ocean freight expense going away across the first half and that it will be comped in the back half. But the price increases that the team has put through for the most part, we'll be able to offset that. And we would expect the Brand Portfolio gross margin to be up 100 to 200 basis points. So when you net all of that out, I think you can make it really easy and just kind of assume we're going to work to kind of hold right around that 44% range for the year. On the expense side, we went through -- we shared where we were investing dollars. I think we ended the year of that being around 36%, 36.5%. I think you can assume that with inflation and wages, whether it's in stores or also in our DCs, we would expect that to go up a little bit, probably not more than 100 basis points. And so I think you can use that to kind of model across the year. And I think you can get within the sales guidance that we provided of flat to up 3%. The -- clearly, the growth that we see is really going to be driven on the brand portfolio. And then Famous is lapping some government stimulus and the like. And so I think you can get to those ranges by modeling it that way.

That's very helpful. And just a follow-up to that, as far as offsetting incremental costs like ocean freight, I just want to sort of reiterate what you just said. The price increases that have been instituted for the first half of the year are expected to offset those incremental costs, I guess, unlike the fourth quarter?

That's right. That's right. The third quarter, if I recall, Jay, you guys were down roughly 350 to 400 basis points. That was almost all driven by the $12 million of incremental ocean freight. And what we said at the time is we didn't go back and change pricing on orders that we had already taken when we saw those ocean freight costs going up. And so our price increases were really effective for spring. We shipped some of that spring in the fourth quarter, and we were able to offset about 280 basis points of that. And then the expectation is that you should see the offset in Q1 and Q2 come through based on the price increases that we had passed through.

That's very helpful. Diane, just a question on the wholesale order book. Do you see a material change in fashion for goods that are being delivered, say, in the first half of the year versus the second half of the year is dress and dressier items becoming a larger portion of the mix of what is being demanded at wholesale in the back half? Or is it relatively similar?

Great question, Steve. As you can very well imagine, our order book right now and our position, we're feeling very good about what that currently looks like. And as we get more inventory in and as we get that out to retail and in front of the consumer, we really see our sell-through rates continuing to improve. And as we have taken a look at this demand for dress, right, who would have really expected that it would come back this quickly, but it's just been tremendous. So as we've been taking a look at that, close to, I think, 30% of some of the -- our bookings have been in that category. And don't think about it not as a so-called traditional dress, but anything really that opened up dress things to go to social occasions, and things on a heel that sort of thing. So yes, it's grown considerably because the consumer really wants to get out and is going to wedding. So I think we heard Jay didn't wave that -- and I think a lot of the people have 2.5 million weddings and 2022 and they're having a hard time getting places to have the weddings and the reception. So there's a lot of people thinking that's going into 2023, which, of course, we're paying for that actually to happen. But Jay, anything also on the backlog and the pre-books and all of that sort of thing?

I think, Steve, we see the dress piece, we said it's about 30% of our on-order position that compares against 15% in 2021. And that is actually above where we were in the first half of 2019. So it's a really strong trend. I think the most exciting thing is as the product comes in, the sell-throughs are very, very high. So we see that continuing as we go through the year.

Okay, that's really helpful. And I just have one more question for whoever wants to answer regarding the supply chain. Do you see any let up in either or by the third and fourth quarter of this year? Or is this really just planned to be as sticky as it is now through the balance of the year?

I think, Steve, our assumption is that it's going to be sticky all the way through 2022. I don't think there's any reason right now to believe that we should expect anything different. I think it allows us to be really proactive and working through what we have to do to ensure that we have the goods here to satisfy our partners and our consumers all the way through. So we don't expect it to change significantly. And you hear a little bits coming out of China or Vietnam to where the little districts will pop up with COVID happening or the latest one yesterday where there's a shutdown or lockdown in different cities. So that -- I don't think that we can expect that that's going to go away completely. So we're sort of used to it. It's the new normal that we're operating against in and we'll just manage our way through it and do what we need to do. But don't see it changing.

Next question will come from Laura Champine with Loop Capital.

It's a little bit more around the guidance for half of earnings to come in the first half. Especially Ken, in keeping with the thought that brand portfolio probably has a better back half based on margins. What does that imply in terms of expectations for sales and promotional trends this back-to-school season?

I think it's more it's the momentum coming out of Q4 and Q1 and Q2 being quite a bit larger than what they have traditionally been as opposed to Q3 being less. So what we -- we typically -- if you go back pre-pandemic, we would see 40% of our earnings come in the first half and then 60% come in the back half. So just in modeling, we thought we would make it easy for everyone if you take the $3.75 to $4, and you just divide it by 2 and you split it across the first 2 quarters, you ought to be pretty close to kind of what we're thinking. Obviously, there's a lot of work required to actually make that happen, but we felt like that was probably the easiest way to explain our view of kind of what's going to happen across the first half.

And Laura, maybe to your question about promotional activity, and what did that mean in the back half. It really our promotional calendar will not change at all relative for '22 versus what we did in 2021. So very consistent calendar in the quarter.

Got it. Does that imply that you keep the positive top line momentum in the first half but maybe see a lower sales result in the second half? Or should I not try to find a sales outlook in your guidance today?

No. I mean I think that as you heard from Jay, our spring order book is good. We expect good spring selling. And then I think our view is Q3 and Q4 right now, managing the day-to-day just seem like a long way off. And so clearly, our visibility over the first half is much better than it is across the back half. So I wouldn't read a whole lot into the selling. I mean, we tried to give you that range between flat to up 3% to account for some of that variability.

Your next question will come from Dana Telsey with Telsey Advisory Group.

Congratulations on the nice progress. A couple of things. As you think about the SKU count, I think Diane, you had mentioned you're tightening the SKU count. Where is it now from where you had been? And where do you see it go going forward? And any updates on Active and Nike, what you've seen in Famous and how that has contributed. And then I have a follow-up.

Great. Thank you, Dana, for your comments as well. Let me start with your second one first. Actually, our business at Famous, so momentum that we really ended fourth quarter with has continued into the first quarter. We have not seen any slowdown at all in our athletic and our sport business. In fact, it's continued to be as strong as it has been with a few new items coming into being some of the top sellers, which has been nice to see. Our business with Nike continues to be great, and we don't expect to see anything with any change with respect to our performance there. So really feeling very good about the momentum with our Famous business overall. I think as we look at edit-to-win, our Jay was really the architect of making sure that we thought about that because it was critically important as we looked at a much tighter supply chain and we looked at productivity and profit and really wanted to get our gross margins up much higher on the brand portfolio side that it was important that we make sure we keep the customer happy too. And we wanted those brand loyalty scores and our ESQI scores and all of those things up as high as possible. So I would say, Jay, I'll let you give the numbers, but I think we are -- we cut it back about 10% to 15% the first slug and you're looking to do another 10% I think, on top of that or so. But ....

Yes, that's really the story. It's 10% to 15% was where we were. We're looking at it very closely by brand and really making the right decisions. And I have to say so far, it looks like -- our initial results seem like it's pointing in the right direction. We're going to continue to update quarter-by-quarter on our progress against that strategy. And obviously, seeing how it works, but it's allowed us to really get our inventory behind the most meaningful styles that are really helping propel our business.

Got it. And then a quick follow-up. On the brand portfolio, I think the price increases for spring was set at around 15% in the brand portfolio. Does that continue in the fall selling -- in the upcoming fall selling season? Or how you're thinking about that? Does it differ by brand? And then one for Ken, given that interest expense is lower by around $20 million versus 2019. As you think about selectively reducing debt going forward, what's the picture of that as you look forward?

So Dana, on the -- you're exactly right. Your memory is good on the price increases. It was 15%. And Jay, do you want to comment on kind of how you see it going forward?

I think we'll take it all the way through the I think we'll continue on that 15%. And then obviously, we'll start to lap that as we go into fourth quarter where we come up against where we hit the spring already. So I think that's really the answer. But yes, that would be the number, very consistent.

And Ken, on that interest expense.

Yes. On the interest expense, I mean, we'll generate well over $200 million of operating cash in 2022. And so our decision of how much will go to paying revolver debt down will likely depend on kind of what happens on the stock price at these prices, we feel like it's highly undervalued. And so Fortunately, our Board was willing to increase our authorization. So we plan to be using some of that cash to buy back those shares. So that will all depend on kind of how that plays out. But we're comfortable where we are today. We've got 0 long-term debt. We've got $290 million outstanding against our line of credit. We will be going into Q1, investing in working capital. As you saw, there's $160 million of inventory in transit. We're working our way through to make sure that we're positioned to capture the demand that we think is out in front of us. So we're looking forward to putting that cash generation to work.

You do have a follow-up question from Steve Marotta from CL King & Associates.

I'm just wondering if there were any shares repurchased in the year-to-date period.

There has not been any in the year-to-date period. We would have been closed in terms of the window. So we did buy about 600-and-some-odd thousand shares back $17 million, I think, in Q4, but we have not purchased any here in Q1.

And at this time, there are no further questions in queue. I would now like to turn it over to Diane Sullivan for closing remarks.

Thanks, everyone for listening this afternoon. '21 was an exceptional year for our company. We did capitalize on market opportunities, control the controllables and really made excellent progress against our strategic initiatives. We're confident that these results, coupled with the structural changes that we've made across our business should drive long-term value creation for our shareholders. We really look forward to providing you with an update when we next speak with you in May. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.