Good morning and welcome to Caleres First Quarter 2024 Earnings Conference Call. My name is Christine, 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 morning. And thank you for joining our first quarter 2024 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 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 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 on the call today are Jay Schmidt, President and CEO, Jack Calandra, Senior Vice President and CFO. 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, Logan. And good morning, everyone. I'm pleased to report that Caleres started the year in strong fashion, delivering solid financial results, making important progress against key strategic initiatives and investing carefully and deliberately for the long term. In total, we achieved earnings per share of $0.88, exceeding our expectations and providing a solid foundation for the year. While our first quarter sales were slightly below our expectations, declining less than 1% year-over-year, we generated stronger-than-expected gross margins, which led to bottom line strength. In fact, the consolidated gross margin of 47% represented a first quarter record for the company. In addition to our financial accomplishments, during the first quarter, we gained market share in both the Brand Portfolio in women's fashion footwear and in shoe chains for Famous Footwear, and saw significant growth in the total sales and increased market share in the important kids category. We utilized our leading speed to market capability, growing our speed penetration to 30% of Brand Portfolio receipts to capitalize on top selling brands and styles. At the same time, we strategically invested in initiatives essential for our future growth plans. These included enhancing our marketing ecosystem, specifically new marketing campaigns at lead brands – Sam Edelman and Naturalizer – which resulted in improved consumer metrics for both; expanding our international presence, opening two owned Sam Edelman stores with plans for more, including the first flagship store in Southeast Asia at the premium Marina Bay Sands in Singapore; improving the consumer experience at Famous Footwear, where we converted 10 locations to FLAIR and refreshed other stores in the fleet; and upgrading our financial and operational system into a new integrated SAP platform. The go-live for the first phase is on schedule for early June. Finally, we returned $18 million to shareholders through…

Thanks, Jay. And good morning, everyone. During today's call, I'll provide additional details on our first quarter 2024 performance and share our outlook for the second quarter. For the first quarter, sales were $659 million, down slightly to last year. As Jay mentioned, this performance was driven primarily by declines in seasonal items, namely sandals and boots in both business segments, as well as by pressures from the challenging consumer demand environment. Brand Portfolio sales were down 2.6% and Famous sales were up 0.1%, with comparable sales down 2.3%. Consolidated gross margin was 46.9%, a 120 basis point increase versus last year, and a record for the first quarter. Brand Portfolio gross margin was 46.6%, a 240 basis point increase versus last year. This improvement was due to higher initial margins, a favorable channel mix, and a reduction of discounts and allowances on cleaner inventory. Famous Footwear gross margin was 46.1%, up 50 basis points versus last year. While the business was more promotional, which resulted in lower initial margins, improved shrink and lower freight costs more than offset that decline. SG&A expense was $266 million or 40.4% of sales and included planned investments in marketing behind our lead brands, the expansion of our international business, and the implementation of the integrated SAP platform. Operating earnings were $43 million and operating margin was 6.5%. Operating margin was 13.1% at Brand Portfolio and 4.8% at Famous. Net interest expense was $4 million, down about $2 million from last year. The weighted average borrowing rate in Q1 was 6.6% this year versus 6.2% last year. Earnings per diluted share were $0.88 versus $0.97 last year and EBITDA was $57 million or 8.7% of sales. Turning now to the balance sheet and cash flow. We ended the first quarter with $191 million in…

[Operator Instructions]. Our first question comes from the line of Ashley Owens with KeyBanc.

First, is there any more color you can give on the guidance for both the second quarter and fiscal year for your expectations between Famous and the Brand Portfolio given what we saw in 1Q? I guess specifically on the Brand Portfolio, do you expect that we'll continue to face tougher trends within the underperforming categories and lack of promos in the second quarter or is that more of a first quarter dynamic?

This is Jack. I'll start. Certainly, I think when we look at the second quarter, we expect Famous to provide sales growth probably in the mid-single-digits. And again, that is coming in large part from that shift of that critical back-to-school week into Q2 this year from Q3 last year. That said, we also expect the Brand Portfolio to generate a low-single-digit comp. So that gives you some sense about Q2. Obviously, as we get into the back half, we're starting to see the initiatives that we've been investing in continuing to take hold, and so expect that trend to continue into the back half. Obviously, knowing that in Q4, we have that 53rd week that we are lapping from last year.

It's Jay. I think on the Brand Portfolio, I think some of the category callouts that we made are going to be behind us in first quarter, and so, second quarter, we think we'll be in a better position to hit the guidance that Jack indicated.

On wholesale really quickly, can you elaborate on anything trend-wise between the channels of the department stores, shoe chains off price and just how you expect that to look in the back half or anything you can comment on what you're seeing so far this quarter?

Well, we are seeing a significant movement toward casual and away from dress, and we see that building for the full year. As called out, our sneaker business has been good and it's been a good across channel and across brand and across price point and that's in the fashion side on the Brand Portfolio. So we see that trend continuing as we move forward. And then, again, the shift toward more casual and lower heel product as we go through and that will probably go into the boot piece. Over on Famous, we continue to see that build happening. And in Famous, the prioritization between kids being first, women second and men's third seems to be continuing, which is why we're really amplifying the priority of that in that order. The other thing about Famous is that athletic continues to perform better than fashion at the moment and we do see a lot of athletic strength per brand going forward into the third quarter and fourth quarter. So I think you'll see those trends again toward athletic, sneakers and casual continue through the year and our ability to pivot toward that is really going to be what drives those numbers going forward.

[Operator Instructions]. Our next question comes from line of Dana Telsey with Telsey Advisory.

As you think about the current state of the consumer, both for Famous and also for the Brand Portfolio, anything that you're noticing change between the fourth quarter and the first quarter? And when you think about, Jay, fashion innovation, newness out there, what percentage of the offering is being driven by that? Are you adjusting any prices or is the margin or price points on that higher? Lastly, as we think about back to school, any difference in how you're planning back to school this year versus last year? Just lastly with the FLAIR stores, how are those doing? Any updates on versus the base and any tweaks being made in terms of how you're thinking about performance for the back half of the year?

I think totally, in terms of coming out of Q4, we're really just seeing a build of again the sneaker performance and also the casual component being much stronger. We can see it in places like – again, our fashion sneaker business in the Brand Portfolio is very, very good. Up double digits. We're continuing to lean into that with our speed program and that worked completely across. We're even seeing the same thing in our men's business in Allen Edmonds where the sneaker business is very, very strong. So we're going to continue to make that. Probably, it's not that it changed, but it's even building faster. So we're really using our speed to really pick up and get that to be a very high penetration of the casual offering. Over on the Famous side, I think we saw strength in a lot of brands coming out of fourth quarter that were more athletic and also brands like Birkenstock and Crocs and others. And those big brands continue to perform. We're seeing some good athletic strength happening there and a continued focus on really the item and the sneaker that the consumer wants. So it's continually being very specific and item driven. In terms of newness, we continue to make that a priority of our business every single moment. I don't have the exact number on what that would be to our total, but for sure the consumers like that. They also like new versions of the same styles that they've had before, new SKUs, new materials, new colors as we continue to build on item strength. So that's what we're also leaning into and getting this to really work. Finally, our FLAIR stores are doing well. What did we learn from our experience? We like a larger store footprint that we can really showcase the brands that we're showcasing in those stores. So that's very important to us in terms of the size of the store. We're also – highly visible stores from a major entrance or something are actually working better. The other thing we did with all of the FLAIR stores beginning this year is moved kids to the front of the store. And we've seen that had a very strong effect as people walked in. And then we continually pivot and make sure that as you walk through all of the brand assortments that we're seeing continue to shift as the business shifts with them and the brands become more important. But we're very, very excited about what we're seeing and mostly because the consumer's excited about it. And that combines with a better growth lift. You'll continue to see more effort on us in this area going forward.

Our next question comes from the line of Mitch Kummetz with Seaport Research.

Jay, you mentioned in your prepared remarks, sequential improvement through the quarter. Can you elaborate that on the Famous side and anything on early May as well? And then I have some follow-ups.

We did see – basically, with that sequential performance, the months got better as we moved into it. I think that's kind of embedded in the fact that we saw foods being down significantly in Famous that impacted our February performance, got better in March and then improved somewhat better in April. We're seeing maybe slightly softer as we get into – head through the month there. It is one of our smallest months in the quarter. And, obviously, we're focused on our key back-to-school time period, which is going to be soon. So that's really where we saw the trend lines going for Famous as we move through.

Actually maybe a follow-up there on back-to-school. How confident are you from a product standpoint just in terms of kind of what the pipeline looks like and your availability on inventory, particularly around sneakers, which I would think would be important for you guys for back-to-school?

The pipeline is very, very good. We're not having issues with that. Obviously, we continue to build on our kids' inventory and we'll be in good position for back-to-school. But, for sure, we're looking to continue to expand on that. The other piece that we talked about is a lot of key athletic brands have continued to surge as well as Nike where we are in better position going into back-to-school. So we're feeling really very good and confident about that. And that's been a key effort. And then having our marketing and our stores positioning aligned with that is going to be very important. But, for sure, we're not experiencing pipeline issues at this moment.

Jack, on the margins for 2Q, can you maybe speak to what you're anticipating, gross margin versus SG&A, and then I've got a follow-up for you.

Mitch, if I go back to the comments we made when we gave our full-year guidance back in March was that we expect this year to get 20 basis points to 40 basis points of operating margin improvement, and for that operating margin improvement to come from gross margin improvement and for that gross margin improvement to really be focused on operand portfolio. And I think you've seen that play through on Q1. In terms of the second quarter, I would anticipate we'll continue to see nice improvement in gross margin in Brand Portfolio, so a continuation of that. The investments we're making in SG&A around marketing, around international, and our SAP common platform continue into the second quarter. Those start to fall off. Some of those start to fall off a little bit in the back half. So, that's how I kind of think about Q2 in terms of those two components.

I guess, lastly, just on the Brand Portfolio gross margin. It was up, I think, over 200 basis points in the first quarter. Are you expecting that level of improvement over the balance of the year? When you think about the puts and takes on gross margin, are there certain things that are less beneficial to you as we kind of roll through the year? Anything you can say there?

I think, again, the gross margin in Brand Portfolio, the improvement there will be the driver of that overall consolidated gross margin that we've talked about, and that will be the driver of the operating margin improvement. So I would say we're still looking for really nice improvements in gross margin year-over-year. Again, as we said, we're getting it through initial margins. We're getting it through the benefits of cleaner inventory, and we're getting it through a more favorable channel mix, given that our direct-to-consumer business is growing faster than our wholesale business. So, I would expect those three things to continue as we move through the year.

Thank you. We have no further questions at this time. Mr. Schmidt, I'd like to turn the floor back over to you for closing comments.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.