Good morning, welcome to Caleres First Quarter 2023 Earnings Conference Call. My name is Sherry, 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 conference over to Logan Bonacorsi, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining our first quarter 2023 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 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, Senior 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. During the first quarter, we leveraged our diversified structure to deliver earnings per share at the top end of our guidance range. Profit contribution from the Brand Portfolio more than offset the challenging operating environment at Famous Footwear. As we said last quarter, the structural changes we've implemented over the last several years have resulted in a much more nimble, productive, and profitable organization. This quarter's performance underscores the value of the Caleres platform, the strengths of our omnichannel capabilities, and the power of our carefully curated portfolio. We believe this structure enables us to be successful in a variety of different operating environments. Now let's turn to some key highlights from first quarter 2023. We delivered earnings per share of $0.97, driven by a record profit in our Brand Portfolio. We sustained total Caleres market share of more than 6% of the U.S. footwear market. We grew market share in the Brand Portfolio with many of our brands improving their rankings, and we increased Famous Footwear's market share in shoe chains. We managed our inventory levels very well, ending the period approximately 13% below the prior year period, and down 3.6% compared to fiscal year end 2022. We continue to drive investment in strategic areas that are essential for our future growth. We maintained our longstanding quarterly dividend and we prioritized debt reduction, utilizing our free cash flow to reduce the borrowings under our asset base revolving credit facility by $16 million from fiscal end 2022. As we've communicated, after funding our dividend, we believe that continued debt reduction is the top priority for cash flow near term in this uncertain macroeconomic environment. Now let's move to our first quarter operating results. Overall, consolidated sales declined 9.8% falling short of our initial…

Thanks, Jay, and good morning, everyone. In this challenging market environment, we achieved better-than-expected gross margin and profitability in Brand Portfolio and maintained strong financial discipline across the company. This resulted in earnings per share at the upper end of our guidance and healthy cash flow, which enabled us to reduce debt, while still investing in our critical growth initiatives. In today's call, I'll provide additional details on our first quarter performance, discuss actions we are taking on expenses in light of the more difficult operating conditions at Famous, update you on our capital allocation plan and priorities, and share our outlook for the second quarter and full year fiscal 2023. My comments on our outlook will be on an adjusted basis. Please see today's press release for a reconciliation of adjusted results. Starting with Q1, consolidated sales were at $663 million, a 9.8% decrease versus last year. Famous sales were down 9.2%, as its more moderate income customer continued to grapple with inflation and higher interest rates. Comparable sales were down 8.5%. Brand Portfolio sales were $326 million, down 11% to last year, and in line with our expectations. You'll remember that Brand Portfolio was lapping the restocking at wholesale accounts that was highlighted in last quarter's call and factored into our guidance. Even with this difficult compare, this sales volume was the second highest first quarter amount in Brand Portfolio's history. Despite the sales decline, consolidated gross margin increased 120 basis points to 45.7%, reflecting a significant increase in Brand Portfolio gross margin, and a decrease in Famous gross margin. Brand Portfolio gross margin was 44.2%, a more than 600 basis point increase versus last year, due to higher initial margins and lower ocean and air freight costs. Famous gross margin was 45.6%, a 360 basis point decline…

Thanks, Jack. In closing, we are pleased to have delivered EPS at the upper end of our range for the first quarter, and maintained EPS guidance for the year. These results demonstrate the power of our portfolio, the strength of our company, and the dedication of our team. We are committed to disciplined and nimble expense management as we continue to invest in capabilities that drive growth. I am confident that the commitment of our incredibly talented team, coupled with our strategic approach, will help us deliver strong results for the balance of the year. And with that, I'd like to turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question is from Abbie Zvejnieks with Piper Sandler

I have two. So first, is there any color you can give on the guidance for both the second quarter and fiscal year between your expectations for Famous Footwear and the Brand Portfolio? I guess specifically on the Brand Portfolio, do you expect that you will continue to face tough compares with fill-in in the second quarter, or was that mainly just a first quarter dynamic?

I think, just in terms of the Brand Portfolio, we do believe that we will have lapped most of that by the time we get into the second half. And then I'll let Jack fill in on the color by segment.

Yes, Abbie, thanks for your questions. So we don't give specific guidance by segment, but to be helpful, let me give you a little bit of color. So, we are certainly expecting Famous’ sales to improve versus the first quarter. We are tracking to our forecast quarter to date. So we feel good about that. And then I would say in the back half, really our guidance assumes anywhere for Famous, anywhere from a deterioration of what we expect in Q2 to an improvement in what we expect in Q2. But in both cases we still are expecting negative sales growth for Famous for the year. In BP -- and Jay will give a little bit more color on some of the initiatives that support this, we are expecting BP to show some improvement in the back half. Again, part of that is no longer lapping this wholesale restock that we talked about as well as some of the initiatives we've got and feel really good about on our lead brands.

Yes. And I would say Abbie, that includes obviously the investments of the lead brands. We talked about Sam Edelman, Naturalizer, Allen Edmonds, and Vionic. And then specifically as we really are modeling the market right now in product opportunities, we see the whole fashion sneaker part of our business growing exponentially and we're able to get back into position on that in late second quarter and think that, that will really help us drive through, really further showing this power of our company, our sourcing model and our portfolio and all of those lead brands fit really well and we'll be maximizing that category as well too.

And then just your inventory management has been really strong, I mean, especially compared to peers in the space that have said they'll need to continue to be promotional. So you said you feel good about the quality and quantity of your inventory. But how does the peers' promotional strategy impact your promotional strategy through the remainder of the year?

Well, I think we believe that obviously we're going to model it very closely and keep in control of that and we'll be watching the competitive landscape all the way through. But continually, our model on the brand side is not really -- it's managing those brick-and-mortar inventories, really closely driving our digital business. And at Famous, we kind of look at it the same way where we're really maximizing our in-store opportunities and giving them what they need and really watching the quality of that inventory. And I think that's going to be the key thing that helps us manage it as we go forward.

Yes, and Abbie, just to add to Jay's comment, I mean, we believe that our consolidated inventories will continue to be down versus last year in Q2 and Q3. So we will be making sure we continue to manage that tightly and don't have to take any actions to clear our own inventory.

Our next question is from Laura Champine with Loop Capital.

Just kind of a little more color on what the investments are that you're making in those key Brand Portfolio brands. Are those marketing investments, are they infrastructure? What do you need to do there?

Well they're both marketing and in terms of product, more category expansion within those brands that we see will continue to drive. And then they also are feeding off of some growth vectors as we develop different points of distribution and different customers, while we continue to develop our own digital business and continue to drive that. So it is a combination of things. It's not just one thing, but we do feel that that will continue to get us there and maximize through.

Our next question is from Mitch Kummetz with Seaport Research.

I've got a few. Jay, starting with Famous in the quarter, you mentioned it was worse than planned. Could you speak to why that was? Was it weather worsened your planning, tax refunds had maybe a bigger impact than you had thought? Or was it just that moderate income consumer ended up just being softer than what you thought going in? Or maybe there was something -- some other reason?

Yes, actually a little bit of all the things you mentioned, Mitch, I think that was accurate. First of all, coming into the first early two months, we did see weather as a factor. And that March was our worst month in Famous, and we saw a nice improvement on that in April. So I have to believe that weather had something to do with it. But in general, we know that there are some headwinds coming out there and people are actually really focusing their purchases on the key items they want. And so that's what we've done is really come back on Famous and really improved our inventory position and continue to fuel the things that we can control, which is mostly the items that they want in all the colors and sizes that they need. So, that would be really our strength for that. But we do think it's a little bit of all of what you described. As usual, we focus on controlling what we can control and then and that's really where we put our efforts.

Okay. And so, April was better than March. Has that continued into May? And as you've guided for 2Q, particularly as you're thinking about the Famous piece, is the uptick from Q1 based on kind of what your trends that you're seeing quartered to date? Or is it more about optimism around back to school or again, maybe some combination of the two?

I think it's a little bit of combination of two. As I said, April was markedly better than March for us. So we think that that's a little closer to where our modeling comes through. And then with the actions that we've taken to really put ourselves in a better place going into back-to-school, we do think that those two things in combination will do it as the consumer will continue to prioritize, we believe purchases for the family, particularly their kids.

Okay. And then on the profitability, so Famous was in Q1 was down year-over-year, but better than '19 and BP was, I think better for both. So how are you thinking about -- where do you think those could sort of land for the year? I mean, I assume you expect Famous margins -- EBIT margin to be down. Is -- you still expect it to be up over '19 levels, and then BP as well, is BP margin going to be up year-over-year, do you think?

Well, we do believe that the BP margin will continue to be up based on a lot of things, working in our favor there. And it's really about the -- those initial margins that we've been able to do. Our mix is much better. And obviously with continued savings on the freight side, all three of those things will help us, I think thereto. And then we have some other pieces there. I'll let Jack jump in on the Famous piece.

Yes. Mitch, on the Famous piece, we posted 11.5% operating margin last year in that business. We had signaled that, that was going to come down this year. I think just given the softer expectations for sales, we likely will not hit that sort of 10% operating margin target this year, but we still feel like that's the appropriate target long term, and that's why we're making these changes on the cost structure in Famous, but also in other parts of the business to provide sort of that fuel to get that margin back at 10%.

Our final question is from Dana Telsey with Telsey Advisory Group.

As you think about the comp store sales, particularly at Famous Footwear, what were the complexions to the comps? What you saw on ticket or traffic? How did that range? And is the uptick that you've seen now, are we seeing meaningful improvement? And then on the Brand Portfolio with the margin improvement, what are you seeing in terms of wholesale orders and also AUR?

As usual, Dana, I'll start with the last part of your question and move my way backwards. But we did see -- first of all, AUR was actually up for us. So it is -- it's up slightly, so that means a really nice hold as we came through and really came through that '22 space where we really do feel our strategy there has worked really nicely. In terms of our wholesale inventory or our wholesale order book I should say, it's very much in line with what we've seen quarter-to-quarter. Obviously, there's more reorders coming through, more drop ship than everything else versus last year when people were up buying quite a bit. But we see our order book as we feel pretty confident that it really meets where our guidance has been and does just reflect a lot more of it's going to be more dynamic I would say going through there and our model really pivots to accomplish that. So then in Q1, overall, we did see kind of a mix on Famous Footwear pointing to the quarter. Our conversion was actually pretty good, but our traffic in brick-and-mortar was down for the quarter. And then we had a little bit of a different dynamic in Q1 on the e-com side, but where that was -- conversion was actually down, traffic was roughly flat. So I would say overall we just saw a much slower start to the whole season and obviously we're working on things to improve it.

And then just on unpacking the gross margin for a second and operating margin, freight benefits this year, what are you seeing for that? And is there any other puts and takes as we go through the back half of the year, whether it's on raw materials or any other commodity costs we should be mindful of?

Yes, Dana, it’s Jack. I would say, in terms of the freight benefit, we're actually expecting more freight benefit in the back half. About 60% of the freight benefit is coming in through the back half versus about 40% in the first half. And that includes both what we had planned for and then this incremental $10 million that we talked about. So that's obviously a nice tailwind in terms of the gross margin there.

We have reached the end of our question-and-answer session. I would like to turn the conference back to our management for closing remarks.

Okay. Well, thank you, everyone, for joining us. I just want to close by again, thanking our great team at Caleres, couldn't accomplish any of this without them. And also thanking both our vendor partners at Famous and our retail partners out there. We look forward to seeing many of them in market and many of you as well. So, thank you, again.

This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.