Good morning, and welcome to Caleres Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. My name is Sherry, and I will be your conference coordinator. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Liz Dunn, Senior Vice President of Corporate Development and Strategic Communications. Please go ahead.

Good morning. Thank you for joining our fourth quarter and full year 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 that 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 these -- in discussing the results of our operations, 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 others used in today's earnings release, on our presentation on the Investors section of our website. The company undertakes no obligation to update any information discussed in this call at any time. Joining me today on the call are Jay Schmidt, President and CEO, and Jack Calandra, Chief Financial Officer. We will begin this morning's call with our prepared remarks, and thereafter, we will be happy to take your questions. I would now like to turn the call over to Jay. Jay?

Thank you, and good morning, everyone. I'm pleased to report that Caleres delivered another strong performance during the fourth quarter 2023, capping off the third straight year of adjusted earnings per share above our $4 baseline. These results continue to underscore the power of our portfolio of brands, the focus of our talented team, and the magnitude of our structural financial transformation. Overall, 2023 marked another year of significant accomplishment and disciplined financial execution at Caleres. In total, we delivered annual sales of $2.8 billion, in line with our expectations. We achieved adjusted operating earnings of $201 million, and generated a strong consolidated adjusted operating margin of more than 7%. Our adjusted earnings per share of $4.18 was in line with the outlook we reaffirmed in January. And we generated approximately $260 million in adjusted EBITDA. We are particularly proud of these results, which were achieved while navigating a dynamic demand environment and making prudent investments in support of our future growth. In addition to our financial accomplishments during 2023, we gained market share in both the Brand Portfolio in women's fashion footwear and we gained market share in Shoe Chains for Famous Footwear as well as in Kids. We leaned into our Edit to Win initiative and leading SPEED capabilities, which facilitated a nearly 7% reduction in inventory. We generated $200 million of cash from operations, and strategically used that cash to invest in and accelerate value-driving capabilities essential for our future growth. This included enhancements to our marketing ecosystem, the expansion of our international presence, particularly at Sam Edelman, the involvement in consumer experience at Famous Footwear, and the upcoming go-live of our financial and operating system into a new integrated SAP platform. We also deployed cash to further strengthen our balance sheet and enhance our financial flexibility…

Thanks, Jay, and good morning, everyone. During today's call, I'll provide additional details on our fourth quarter and full year 2023 performance, update you on our capital allocation activities and plans, and share our outlook for 2024. Today's comparisons will include the 14th week for Q4 and the 53rd week for the full year, unless otherwise indicated. We've included a table in the release outlining the sales impact of the extra week for each segment and for total company. As a reminder, my comments will be on an adjusted basis. Please see today's press release for a reconciliation of adjusted results. Before I turn to the adjusted results, I wanted to give you some detail on the factors leading to the large one-time item included in our GAAP results. Our GAAP results include a release of deferred tax valuation allowances of $0.76 in the fourth quarter and $0.75 for the year, which had primarily been established in 2020 after incurring a significant pre-tax loss associated with the pandemic impact to the business. As a result of our strong earnings performance in 2021, 2022, and 2023, we are no longer in a cumulative three-year loss position and we're able to release most of these valuation allowances. Additionally, the adjusted results include a benefit of $0.05 in Q4 and $0.13 for the full year from our cost reduction initiatives. Now, turning to sales. Fourth quarter sales were $697 million, up slightly to last year. As Jay mentioned, this performance was driven by a 4.5% increase in Brand Portfolio. Famous Footwear sales were down 1.5%, slightly better than our initial expectations. Comparable sales were down 5.9%. Consolidated annual sales were $2.82 billion, in line with our expectations, and down 5.1% versus fiscal 2022. Fourth quarter consolidated gross margin was 43.9%, a 348 basis…

Thank you. [Operator Instructions] Our first question is from Laura Champine with Loop Capital Markets. Please proceed.

Thanks for taking my question. I wanted a little bit more about what's behind your expectation that the footwear industry will decline this year. And maybe if we could start with where you think last year likely fell out as an industry knowing that it's fragmented and then what's behind the expectation that we'll have another rough year this year?

Yeah, Laura, this is Jack. Thank you for your question. So, we get, as part of our planning process each year, the expectations from Circana. And what they're projecting is the market to be down about 1%, with units down a little bit more than that and some favorability on the AUR side. And then, when we look at it by segment, it looks like fashion is expected to be the weakest with sport, leisure and performance stronger than that. And so, we look at that and we apply those categories and those growth rates to our portfolio to come up with what we think it would look like for us to basically hold market share in 2024. And as you know, we've been very successful in growing market share, and this plan assumes that we will grow the market share in both Famous and in Brand Portfolio.

Got it, Thank you.

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.

Hi. Good morning, everyone. As you think about the cadence of the year, first quarter, second quarter, how are you thinking about Brand Portfolio and Famous? And did you notice any deterioration or stabilization through the core Famous Footwear consumer in the fourth quarter? And what are you seeing in order trends for Brand Portfolio from the wholesale channel? Thank you.

Hi, Dana. It's Jay. I think, overall, in just thinking about the consumer, we are seeing, I think, the demand environment remains mixed, as I would say, as we leave fourth quarter and into first quarter. We see our Brand Portfolio consumer continually trend-driven and responding very well to newness right now, which is driving demand. And at our Famous, consumer during fourth quarter and into early first, we did see the market environment remains choppy. Our target consumer, the millennial family, continues to prioritize kids. And -- however, I will say that we're seeing some very strong reaction from both segments on really these highly demanded items. So that's really our goal is to continue to get in front of them and go there. We are seeing a slightly better trend as we move from February into March. And that gives us some sign for optimism, but obviously very early on in the quarter. And then finally, in terms of order trends, they're very consistent to where they've been in previous quarters right now. As you know, our business is highly demand driven and dynamic on our Brand Portfolio and we continue to react in real time with our SPEED program, our dropship program and also our replenishment program to continue to meet that consumer demand.

And then, Dana, I'll just add a couple things on the cadence for Famous. So, just in terms of our overall guidance, we are assuming that Famous will be sort of a modest negative to modest positive comp in our guidance range, low and high. We are anticipating the first half to be stronger than the second half. And a lot of that is just due to the calendar shifts. So, as you know, with the calendar shift, the first week of August, which is a critical back-to-school week for Famous is now falling into fiscal Q2 versus fiscal Q3 last year. And then, obviously, we have the impact of the 53rd week on Q4 this year. So, there's just some shifts with those -- with the calendar that's moving numbers between the quarters. And then, I would just say, look, we expect the promotional activity in Famous to be broadly in line with 2023. And with that would come sort of a flattish gross margin.

Got it. And then, if you unpack SG&A, Jack, anything that we should be thinking about as we go through the year, any quarterly ups or downs in terms of the SG&A impact? And then, Jay, as you think about your own brands in the Famous Footwear store, where are you along that path, and what could that add to the margin opportunity there? Thank you.

Sure, Dana. I'll start with the SG&A. So, part of the reason we're guiding to earnings down in Q1 is there are some investments we're making in SG&A in Q1, particularly the Sam Edelman marketing campaign, and then expenses related to our common platform implementation, the first phase of which goes live at the end of May. And so, there are some expenses associated with that. And then, as we go through the year, obviously Q4, we don't have that 53rd week of expense in Q4. But what I will say is that we talked about last year taking some actions on cost, and I'm pleased to say that we delivered those cost reductions both in 2023 and those are built into our 2024 plan.

Okay. And then, as far as our own brands, we're seeing some really nice results coming out of fourth quarter and then moving into first quarter, particularly with our Dr. Scholl's brand at Famous, our Naturalizer brand, and we're pleased with the early launch of Sam and Libby. And so, we feel that we are well on our track of how we led to our three-year goal there. And we are planning those brands up significantly. And obviously, Jack, the profit on vertical brands is significantly higher than where we go as a company, right?

That's correct.

So, we're very excited for what we're seeing there. And again, that was a concerted effort and we look like we're well on track.

Thank you.

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

Yes, thanks for taking my questions. I've got a few. I want to start -- just on the guide, I want to clarify a couple of things, because I think you guys said that you expect to take share in both Famous and Brand Portfolio. And you're -- as far as kind of a market outlook, you're basing that on Circana down 1%. So, Jack, you're saying on Famous same-store sales maybe down a little to up a little, is that correct?

Yeah, our guide, Mitch, assumes on the low-end would be down a little bit and on the upper-end would be up a little bit. And again, the market numbers that I shared are total, that would include wholesale and retail. And obviously what we've seen is the retail business has been a little bit more -- or at least the retail channel that we compete in and measure market share against, which is the Shoe Chain channel, has been a little bit more challenged.

And so, on Brand Portfolio, what kind of sales growth are you looking for there for the year?

Yeah, we're looking to continue basically the trend that we came out of Q4 with, adjusting for that 53rd week. So, there was a little bit of a benefit for the 53rd weeks, I would say. We're looking for low-single digit positive numbers from Brand Portfolio in 2024. Obviously, Lead Brands being stronger than that and the other brands being a little bit below that.

And then, Jack, I think you said that, at Famous, you expect promotions to be aligned with last year. I think you made a comment of flat gross margin. Was that a Famous comment or is the op margin guidance you gave assume flat gross margin on a consolidated basis for the year?

Yeah, the comment that I made was Famous specific on the flat gross margin. In terms of the 20 basis points to 40 basis points of operating margin improvement, in 2024, we're looking for more of that actually to come from gross margin and particularly on Brand Portfolio. As you remember, Mitch, when we talked about our Investor Day model, we talked about all of the different headwinds and tailwinds in gross margin over three years and said that gross margin at the consolidated level would be relatively flat and we would get operating margin improvement from SG&A leverage. In 2024, again, we're looking for a little bit more on the gross margin side because some of these critical investments we're making in international in some of our lead brand marketing and in the common platform.

And then, Jay, you mentioned that March was better than February. I would guess it's more of a Famous comment. Is that -- do you think that's to do with weather or do you think there's some change in consumer shopping behavior or strengthening of the consumer? Is there anything you can attribute that to?

Yeah. Well, it's early in March. I think it's all of those things. And then, one more, I think the weather, an early spring is always good. And it's -- we've had a much better weather pattern than we've had last year, particularly when you think about Famous being across the country. And so that's the first thing. I think the second thing that just really stood out was that we really are in much better position in some of these key demanding items and the key brands at Famous, and that has really propelled it through as the consumers really pointing very specifically. We've seen our top brands in Famous come back quite a bit. And then, just to answer your question on the Brand Portfolio, we are seeing some nice trends that are similar to that, and again, focused on just really, I think, some of our brands opening up and reacting to a warmer cycle. So, some early signs on sandals and some of our brands have been positive. And as you well know, we did not see that last March. So, there's reason to be optimistic, but it is early still.

And then, last question for you, Jay. There's a lot of talk in the back half of last year of the consumer with shopping events, be it back-to-school or holiday, and then kind of disappearing in between. Do you think that continues this year? And how do you see the impact of events in the first half? Is there much going on from an event standpoint before we get back to school? Like, to what extent do you think Easter or Memorial Day, Mother's/Father's Day, things like that, could drive the business?

Yeah, I think they've been actually not as important as they might have been in past times and we're really seeing weather as an impact. Spring break and vacations kind of stimulating some things, but not as much as those bigger buildups, but really we are consistently on our best product and our best place. And then, as Jack pointed out, there is some discussion of the tax refund. So, I don't know if you want to fill in on that.

Yeah. We -- for the Famous business, we look very carefully at where tax refunds are coming in. And right now, it looks like through data last week, the number of refunds was down about 13%. The average refund was up about 6%. So the total dollars refunded again through the end of last week was down 7%. And we do know that there is some impact of that certainly to our Famous consumer.

Okay. Thanks, guys.

Thank you.

Our next question is from Abbie Zvejnieks with Piper Sandler. Please proceed.

Great. Thanks for taking my question. Jay, you talked a little bit about the consumer being more selective, buying the product that they want, and promotions not moving other inventory as much. One, are you seeing that same dynamic in both Men's and Women's versus Kids? And then two, are you changing your merchandising efforts at Famous Footwear in any capacity in order to meet some more of that key style demand?

Yes, we are seeing it in both segments right now as the continue -- the consumer continues to prioritize spend in different ways. We've said in Famous that the consumer continues to prioritize kids purchasing, so that has continued, and then, also, very much demanded on the styles and the items that they do like and the brands that they really favor, which fortunately we have. Over on the Brand Portfolio side, we're seeing the same thing in terms of newness and trend delivering it. And so, I think what you'll see is on our websites and our continued messaging and communications, we're continuing to focus on new item launches, new styles and new drops. And we're seeing that both in Men's and Women's. And then, over to Famous, one of the things we will be adding to all stores this year is, as we go into back-to-school, it's really the focus on two trend tables as you walk into the stores to really call out these key messages so we can continue to make that impact. And then, as we continue to build the FLAIR store concept, we'll continue to bring that to its fullest extent. So, you'll see a lot more from us on that, but for sure, it's consumer reacting in both segments very specifically by style, by SKU. And then the last thing I'll say is that our SPEED program really allows us to really meet that demand much better as we continue to bring in more product earlier, particularly online, and then get back into it exactly how the consumer is demanding. So, it's been a very good approach for this timing right now.

Got it. That's helpful. And just one more on -- specifically on the Brand Portfolio. Restocking has been a big topic of conversation with brands with exposure to the wholesale channel. So, just in terms of Brand Portfolio's wholesale exposure, have you seen any of that like "restocking" yet or is that something we should look for as a tailwind maybe 2025?

I don't think we've seen an effort on that. Retailers are continually monitoring their inventories well and they're just reordering more and it's less upfront but that's something that we were used to and actually our model allows us to fill into. So, we haven't seen the effect on that as of yet. But right now, I would say that's where we are. And, yeah, I don't see any change in that right now.

Got it. And sorry, just one more on dropship. Can you just talk about that business and how you're utilizing it? Has that changed at all as the retailers have gotten into a better inventory position? Just anything there?

Yeah, it continues to model in a very dynamic moment as we get more into position in stores, we'll see some of that shift into other places where we do slightly more business in the stores and less of that dropship need. We are looking at our wholesale business really as a complete ecosystem. And so, we're continuing to manage the total and in a really omni way. So, we'll see variations of that, I think start to ebb and flow. And then again, as demanded items continue to be more built, the consumer will continue to find them in whatever way we choose to fulfill them. But right now, I don't have any major swings on that to report.

Okay. Great. Thank you guys so much.

Thanks.

Our next question is from Ashley Owens with KeyBanc Capital Markets. Please proceed.

Great, thank you. So, just on Famous, you mentioned Kids grew in the quarter. Could you just provide some color on the performance between athletic, casual, and dress? Just maybe where they start and stands today? And then secondly, just given the customer preference for newness right now, as you're thinking about the cadence of product launches throughout the year within the Brand Portfolio, how does it compare to years prior? And then, would you say that you're coming to market with more products, or would you say it's better products that are kind of going to be helping driving [outgrowth] (ph) this year? Thanks.

Okay. So, first on Famous, the Kids business is -- we have about a 50% penetration in total athletic on our Famous business. That position skews much higher in Kids as they continue to focus on athletic shoes there. But we are also seeing a lot of our big brands work very well there. Just to name a few, we have Crocs business that's continually strong in kids. Hey Dude business that's turned out nicely. And then, Skechers, and then obviously Nike is the biggest one there. We're also seeing newer brands like Birkenstock continue to go in, and then new offerings from brands like Adidas worked very well in Kids. So, anyway, I would say the brands that work very well at Famous continue to work totally, work very well in kids, but we do see a distortion on athletic. And then finally, with your Brand Portfolio question, I hope it's everything that you said and as the consumer continues to respond to it. We're doing more new launches of products. We'll see more limited drops as we go through. We're seeing more collaborations. As we mentioned, there were two in Dr. Scholl's. You'll see more on that from Alan Edmonds and then obviously Sam Edelman's anniversary campaign events that go throughout the entire year. So, we're going to continue. And then we have two new collaborations coming up with Naturalizer, but you'll see more and more of this coming through from us all the way through the year. So, stay tuned. We'll have much more to report.

Great. Thanks so much.

We have reached the end of our question-and-answer session. I would like to turn the call back over to Jay for closing comments.

Okay, thank you. Before we close today, I would like to thank the talented Caleres team for their focus, hard work and dedication. We're confident in our plans for 2024 and beyond as we execute on our long-term strategies. We believe Caleres is well-positioned to continue to build our powerful brands, create exceptional products that exceed our consumers' expectations, and deliver financial results that drive significant value for our shareholders. Thank you all for joining us this morning, and thank you for your interest in Caleres and have a great day.

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