Good morning, and welcome to the Caleres Fourth Quarter Earnings Conference Call. My name is Robert and I'll be your conference coordinator. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'll turn the call over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Good morning. I'd like to thank you for joining our fourth quarter and full year 2022 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. In discussing the results of our operation, we will be providing and referring to certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as other views in today’s earnings release and our presentation on the Investors section of our website. The company undertakes no obligation to update any information discussed on this call at any time. Joining me on the call today are Jay Schmidt, President and CEO; and Jack Calandra, Vice President and CFO. We will begin this morning’s call with our prepared remarks, and thereafter, we’ll be happy to take your questions. I would now like to turn the call over to Jay. Jay?

Thank you, Logan, and good morning everyone. I'm pleased to report that Caleres delivered strong results and exceeded expectations during the fourth quarter of 2022, capping off our best year ever. In short, 2022 was a year of significant operational and financial accomplishments at Caleres. In total, we delivered a 6.9% year-over-year increase in sales and achieved adjusted operating earnings of $217 million. Our adjusted earnings per share of $4.52 was $0.23 better than the high watermark set in fiscal 2021. Perhaps even more notable, this EPS level more than doubled our pre pandemic record and we generated approximately $281 million in adjusted EBITDA. In addition, during 2022, we grew total Caleres market share to more than 6% of the U.S. footwear market, outpacing market growth for the second year in a row with our lead brands gaining share. We improved brand perception metrics with our new customer file in the brand portfolio increasing 28% year-over-year. We managed our inventory levels well ultimately ending the year approximately 3% below fiscal 2021. We intensified our focus on strategic priorities including edit to win, where we reduced SKU count and amplified key product trends and items to drive sales. We continue to prioritize investment areas namely consumer marketing and experience that are essential for future growth. We made significant progress toward our long term ESG goals and we returned more than $73 million to our shareholders through share repurchases and dividends. These exceptional annual results underscore the power of our brands, the strength of our platform and the successful execution of our strategic initiatives. Now let's move to some performance highlights from the fourth quarter. During the period, we achieved record quarterly sales of $696 million, which was 2.5% higher than the fourth quarter of 2021. We generated strong margin levels despite…

Thanks, Jay, and good morning, everyone. Today I'll provide additional details on our strong fourth quarter and record annual results, discuss our capital allocation progress and plans and share our outlook for fiscal 2023. As a reminder, my comments will be on an adjusted basis and will focus on the comparable period in 2021 with some supplemental comparisons to 2019 where helpful. Please see today's press release for a reconciliation of adjusted results. Starting with the fourth quarter. Fourth quarter sales were $696 million, a record for the fourth quarter and an increase of 2.5% versus last year. As Jay mentioned, this performance was driven by a 6.4% increase in brand portfolio. Famous Footwear sales were up slightly the last year and better than our initial expectations due to a strong second half of the quarter. Comparable sales were up 0.7%. Consolidated full year sales increased 6.9% to reach $2.97 billion, marking our best ever annual sales performance. Fourth quarter gross margin was 40.4%, a 300 basis point decline reflecting an increase in brand portfolio gross margin and a decrease in Famous gross margin. Brand portfolio gross margin was 36%, a nearly 200 basis point increase versus last year due to a favorable sales mix toward higher margin businesses, including drop ship and owned e-commerce, as well as a reduction in ocean and air freight costs. Famous fourth quarter gross margin was 42.4% a 650 basis point decline versus last year. This expected decline reflects a more normalized level of promotional activity and pricing. We continue to prioritize the optimization of gross margin with our ongoing goal of achieving annual gross margin in the low to mid-40s for Famous. For the full year, consolidated gross margin was 43.3%, 90 basis points below last year reflecting a 180 basis point increase…

Thanks Jack. This was a great year for Caleres where we more than doubled our pre pandemic earnings level. We are confident that the structural and strategic changes we have implemented, coupled with our talented team and unique infrastructure have set us up to deliver on our 2023 objectives and drive long term value for our shareholders. We look forward to sharing more about our brands and our strategy at our Investor Day on June 14. And with that, I'd like to turn the call over to the operator for questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Abbie Zvejnieks with Piper Sandler. Please proceed with your question.

Great. Thanks so much for taking my question and congratulations on the strong end to the year. So you mentioned outperformance at Famous Footwear in those last six weeks. Have you seen that same outperformance continue into the first quarter? And then I have one follow-up after that.

I would say, as we opened up first quarter, starting out a little softer than what we saw in the last six weeks in Famous, although we did see some of the key styles and trends going. We're -- at Famous, we always think that our consumers is very aware now and we're still seeing new casuals and retro joggers and kind of the fashion sneakers that they were selling continue on there. And we expect we'll see a lot of spring sandals and other things that are currently selling in the brand portfolio open up as we get later into the quarter.

Yes. And Abbie, thanks for question. This is Jack. So just to add to that, as you know, in the first quarter, the major part of the quarter is still ahead of us with, obviously, Easter and some of the events around that. So as Jay mentioned, things have slowed a bit from where we saw the last six weeks of the fourth quarter, but still feel really good about the next six weeks ahead of us, because that is really the prime selling season for Famous.

Got it. And then maybe switching to the brand portfolio, how should we think about that cadence of sell into the wholesale channel? I know you said 1Q will be tougher as we lap that selling from last year, but how does the order books look going forward through 2023? And how should we just model that?

Our order books actually, in terms of fill rate, look consistent to where we've been in the past quarters as we've been in 2022 when modeling that. So we feel good about where we budgeted. If you take out Q1, we're really looking at 5% in the other quarter. So that's really -- we feel like that the moment of that lap and then we'll be back to it in the brand portfolio, but all signs look very good, Abbie.

Got it. Thanks so much.

Our next question is from Mitch Kummetz with Seaport Research. Please proceed with your question.

Thank you. And thanks for taking my questions. I've got a few. Let me start with Famous Footwear gross margin, you guys mentioned normal promotions and pricing in the quarter. But help me understand why it was actually down 10 bps on a three year? And what gives you the confidence that it will be above pre-COVID going forward? And I know that for Famous, you mentioned that op margin should be greater than 10% for the year. I don't know if you can comment on gross margin for the year?

Yes, Mitch, thanks for the question. This is Jack. So I would say, in terms of the fourth quarter for Famous, we did put in place a [BOGO] (ph) in mid-December, as we mentioned, the first six-ish weeks of the quarter in Famous were a bit soft. We amped the promotional cadence, got nice response to the BOGO, but that was a little bit of a margin decline. We also saw some increases in the cost of goods. And so, there was some LIFO reserve calculations that also affected the gross margin for Q4. I would say, we expect -- with inventories getting to a more normalized level, and I think some of those inflationary pressures on cost of goods starting to subside, we wouldn't expect to see that going forward.

Okay, that's helpful. Thank you. And then for Q1, can you give us what your sales outlook is by segment? You mentioned that the quarter started a little slower than the end of Q4, but February is a small month, but it might be helpful that give us the sales outlook by segment? And then also maybe any more color on kind of the margins, kind of how you're thinking gross margin versus SG&A for the quarter?

Yes, Mitch. So in terms of the segment quarterly sales, obviously, we talked about that, what we're anniversarying on the brand portfolio side. So certainly expect that the brand portfolio sales will be lower in the first quarter, again, versus that comparison to 2021 with some -- probably some modest improvement at Famous. I would say, if I look at the full year guidance, both of those businesses are sort of in that range of flat to two, but you have to remember either what they're anniversarying or what they're benefiting from as we move forward. So obviously, Famous is a big beneficiary of the 53rd week, much less so on the brand portfolio. And then, obviously, the brand portfolio has that headwind in Q1 from anniversarying the retailer inventory build for last year. In terms of gross margin, where we're seeing a nice lift on gross margin in brand portfolio is on the ocean freight. So that's -- that business is going to be the big beneficiary of the lower ocean freight that we're seeing coming through, obviously, less so on the Famous side.

Okay. And then last question, you mentioned solid athletic sales on the Famous side in Q4 on better inventory availability. Can you remind us how constrained some of the athletic inventory was throughout 2022? And how that maybe better inventory flow in 2023 kind of impacts the businesses you lap maybe some of those constraints from a year ago?

Yes. I think Mitch we were chasing athletic inventory, I would say, all the way through the first half of 2022 and even into Q3. As we came out of there, we started to see that come through and then really, I would say, some of these key styles, particularly in some of these categories that are more fashion within athletic like this retro kind of style court shoes, et cetera. As well as some of the other key brands that were trending, we really got back into the key items. So I think that led us to a really those last six weeks of fourth quarter being very, very strong. So -- but it was all of a chase there. And as we go into Q1, we feel like we're in really good position.

Okay. Thanks guys. Good luck.

Thank you.

Thank you.

Our next question comes from Laura Champine with Loop Capital. Please proceed with your question.

Thanks for taking my question. It's about the new format for Famous Footwear stores. What would it take for you to decide to roll that out more broadly? And I think you said you're at 10 now. What's the plan for 2023?

Yes. We'll continue -- it's currently a motion, Laura, but we did open -- as we said, we now have 11 total stores opened, six of them have only been opened for a few weeks now. So it's fairly new to us. But we're very pleased with what we see and we will be walking through some of those items. We see us probably adding, I would say, another conservatively 24 additional stores for the back half of this year. But quite frankly, as I said, we're really still putting our total plans together. And if we see us continue to trend on that, we'll continue to look at that as we get through the back half. But very exciting work there.

And just as a follow-up, what's the cost on a remodel to that format?

Yes. So the cost is about $650,000 to $700,000 depending on the store. I would say that is not value engineered cost given the relatively small numbers we've done, but certainly as we continue to grow our confidence that this is really going to accelerate Famous' sales, we would be looking to do some things around value engineering and sourcing that would certainly bring down that cost. But I would say, what we're seeing so far is we are getting a nice return on that investment at that higher level. And so obviously, if we can continue to streamline and value engineer those costs that would just boost the returns even higher.

Got it. Thank you.

Thank you.

Our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.

Good morning, everyone. Just wanted to touch on the promotional strategy at Famous Footwear as you see it going forward and how you're planning it? I know you were editing some of the brands and the promotions, how do you see the promotional cadence and the brands involved in these Famous Footwear promotions going forward? Is there a difference in terms of performance by region? And what's your sense of the consumer health of that Famous Footwear customer, how's the active business? And then Jay just -- I mean, Jack, anything that we should be thinking about out in terms of the balance sheet as we move through 2023? Thank you.

So I think going forward, as we look at our whole cadence, we did see some promotion and more normalized clearance markdowns as we moved into the back half of this year. So we do believe that we'll see that in -- through the first half of this year kind of become to a more normalized basis. And then quite frankly, back half of next year should feel somewhat similar to what we experienced in 2022. We continue to monitor this in terms of asking what's in it. We do have brands, but about 40% more of the styles that we have are excluded from promotions in Famous Footwear, which will, I think, help us normalize that kind of promotional piece to our business. So we're going to watch all this in real time and honestly we'll keep everyone apprised to that. But that really is where our strategy is for the moment. And then Jack, do you want to talk about balance sheet?

Sure, Dana. So I would say, in terms of a couple of key components for the balance sheet. So on inventory, we expect to make continued progress on inventory. I would expect that our inventories at the end of 2023 will show continued improvement versus 2022. We are looking to accelerate turns across the business. We know that's an important component in unlocking operating cash flow. And so, I would expect to see that. And then on the debt side, as we mentioned, right now, again, just given that interest rates continue to tick up. I mentioned what our borrowing rate was for full year and for Q4 and can just share that. Our most recent borrowings are now sort of about 6.2%. So, obviously, those rates continue to increase. And while I'm not an economist, we are basically adopting the consensus in terms of the future interest rate increases that we're expecting for the year. And so we are continuing to in the near term use free cash flow after the dividends and after the investing in the business to pay down debt. And so, we expect that to continue to work down. Again, we still do have that authorization from our board on share repurchases. And so we'll continue to just stay very close to the market dynamics. And if there are opportunistic times when we think it makes sense to buy back shares, we'll certainly do that as well. But I would say for now, focus is on continuing to manage our inventories tightly and improving turns and continuing to bring down our debt level, just given the increased interest expense as well as just making sure that we've got a lot of resiliency and flexibility in our model given the economic uncertainty.

Got it. And then just on the plans for Easter that you had mentioned, Jay. Anything that we should be focused on, whether it's brands, categories? How you're thinking of pricing this year compared to last year? Thank you.

Yes. I think our pricing kind of remains consistent as really I would say our back half of 2022. We certainly are very excited about the strength of our lead brands coming out of our portfolio. We expect them to continue to trend through 2022. Sam Edelman, Vionic, Allen Edmonds and Naturalizer really gaining strength with the consumer and then very excited of Famous as we get going in there and really with all the excitement around the stores and then also new seasonal products that we'll be delivering as their spring opens up. So I would say very excited, but no real changes on really retail pricing as we see it right now.

Thank you.

Thanks, Dana.

Our next question is from Mitch Kummetz with Seaport Research. Please proceed with your question.

Yes, thank you. I've got a few quick follow ups. Jack, I may have missed it, but did you say where you expect either free cash flow or cash flow from operations to land for the year?

Yes, Mitch, we're not guiding to that specific metric, but to be helpful, what I would say is, given the -- on the operating cash flow, given the planned continued improvement in inventories, I would expect to see a step up in our operating cash flow in 2023. We are investing a little bit more on CapEx as I mentioned, that's really returning CapEx to what I consider prepandemic levels. If you look at our CapEx history over the past couple of years in 20 20 and 2021, we spent less than 1% or less in CapEx, we were under spending versus depreciation. And so, we're bringing that back to a more normalized levels, both as a percentage of sales and relative to our depreciation. So a little bit more of a headwind from a free cash perspective with that increased CapEx investment.

Got it. And then you mentioned the sales impact from the 53rd week. Is there an earnings impact?

Yes. So for the company, it's only about $0.02 of EPS. It's $22 million of sales $18 million of that we estimate is on Famous, but a relatively small earnings impact, but about $0.02.

Yes. And then lastly, on the capital allocation, obviously, we're in a rising interest rate environment, but I am curious like how much do you consider when you're thinking about your interest expense versus your share count and the opportunity to kind of take those down. How much do you consider kind of which is more accretive to earnings? Does that get sort of factored into your thoughts around potential opportunistic buyback?

Yes, it's certainly one of the factors and an important factor. I would say, the other factor though is just making sure that we've got liquidity. As you know, there are others in the industry and across industries that have gotten into some trouble by probably buying back more shares and then not having cash and liquidity to weather any sort of bumps in the macroeconomic environment. And so, we want to be really prudent there. That said, we continue to believe our stock is a good investment. And as we think about opportunities on the M&A front, obviously, the bar has been raised just given the work that Jay and the team have done on the brand portfolio and we always want to evaluate those investments versus investing in our own company.

Okay. Thanks again.

Thank you.

Thank you Mitch. We have reached the end of the question-and-answer session. I would now like to turn the call back to Jay Schmidt for closing comments.

Okay. Thanks again for your interest in Caleres. We look forward to speaking to you again at our first quarter call in May. Thank you.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.