Good morning, and welcome to the Caleres Second Quarter 2024 Earnings Call. My name is Rob, and I'll be your conference coordinator. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'll turn the call over to Liz Dunn, Senior Vice President, Corporate Development and Strategic Communications. Please go ahead.

Thank you, Rob. Good morning. I'd like to thank you for joining our second 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 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 and 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 is 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 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. Earlier today, we reported sales and earnings that were below our expectations. While our brands and our products continue to resonate with consumers and we remain committed to and confident in our long-term vision, our second quarter results fell short in both segments and do not reflect our true potential. Our ERP upgrade during the quarter was a significant part of the problem, but not the entire problem. Lack of visibility caused execution issues that prevented us from delivering our expected results. In total, for the second quarter, we achieved earnings per share of $0.85. Our second quarter sales declined 1.8% year-over-year and the sales miss drove the bottom line, miss. We generated strong gross margin rates of 30 basis points, driven by the Brand Portfolio. Now, let me delve into the issues faced with regard to our ERP system upgrade and what we have done to course correct. As you are aware, we upgraded our SAP enterprise system to the new Cloud based version. This was a necessary upgrade that our teams have been working on for the past year, resulting in a common platform to leverage across our Brand Portfolio. Mid quarter, we were down for a few days as we planned. When our systems came back online, we initially saw signs of a successful implementation with e-commerce and order shipping on track. However, as we progressed through the quarter, several key operational reports were delayed causing a lack of visibility to the tools we rely on to drive our business day in and day out. Additionally, there were issues related to size reporting that initially made it difficult for us to service drop ship and replenishment orders. And finally, we experienced late shipments and carrier failures that, while not related to…

Thanks, Jay, and good morning, everyone. During today's call, I'll provide additional details on our second quarter performance, share our outlook for the third quarter, and discuss our revised guidance for the full year. While there were no adjustments to the second quarter this year, please note my comparisons to last year will be on an adjusted basis. For the second quarter, sales were $683 million, down 1.8%, which included a $23 million benefit in Famous due to the retail calendar shift that pulled a peak back-to-school week into the quarter. As Jay mentioned, our ERP upgrade, weak sandal demand and a late back-to-school lift resulted in a shortfall to expectations. Brand Portfolio sales were down 5.1%. Based on our analysis, we believe the system issue resulted in about $10 million to $15 million of lost sales in the quarter, or as much as 5 percentage points of growth. Famous sales were up 1.5%. Comparable sales, which adjust for the calendar shift, were down 2.9%. Encouragingly, we saw sequential improvement in each month of the quarter and that improvement continued with a strong performance in August. Consolidated gross margin was 45.5%, a 30 basis point increase versus last year, and was driven by higher margin in Brand Portfolio, partially offset by a lower margin in Famous. Brand Portfolio gross margin was 42.7%, up 140 basis points versus last year as a result of higher initial margins and a favorable channel mix. Famous gross margin was 45%, down 120 basis points versus last year due to more days on promotion and the pull forward of our BOGO 50 offer as well as higher clearance activity. While we utilize the BOGO 50 offer earlier than planned, we believe we maximize gross profit, given the initial tepid response to our buy more, save…

Thank you. We'll now be conducting our question-and-answer session. [Operator Instructions] And our first question is from the line of Laura Champine with Loop Capital Markets. Please proceed with your questions.

Thanks for taking my question this morning. Jay, just hearing all the things that you've done to fix the ERP implementation issues, should we consider it an immaterial impact on the back half of the year?

I would say that's accurate, Laura. We have really triaged this during the second quarter, and we feel confident that we have all systems go. And where we don't, we have the accurate backups in place until we do that we really feel are very confident in.

Got it. And then on this August rebound, and I think this would probably be tough to tell, but do you have a sense that that was driven by the macro, or could it be that your promotions which were stepping up in that time period are what drove the improved results?

It's -- I think it starts with the fact we were looking here this morning, we have a lot of our athletic brands are trending extremely well, so we were much better in position with key athletic brands. It's representing well north of 50% of our athletic or total Famous business. So getting those key brands in place and the kids inventory in place was the first part. Second part was, as you alluded to, this was the first time that we saw such a high demand on the BOGO versus buy more, save more that it became margin accretive. And that was a different place for us that we haven't seen prior to that. So while not more days in the pure back-to-school business, we do see we got a much higher traffic lift from it. And then finally, our marketing was really all focused on kids during the back-to-school and the key athletic shoes and others that they really drove through. So you're right, it's hard to get one impact on it, but I think those three things in tandem probably drove it through. That would be where I think we wound it up.

Got it. Thank you.

Our next question is from the line of Mitch Kummetz with Seaport Global Securities. Please proceed with your questions. Mr. Kummetz, your line is live for questions.

Yeah. Sorry, I was muted. Yeah. I've got a few questions. On the ERP situation, Jay, it sounds like you said all systems go. I am curious though you mentioned that with Brand Portfolio that you're seeing growth in your receipt plans. Is there any concern about the fallout to those plans? Maybe just as some of these issues might have negatively impacted some confidence in your business from your wholesale partners?

No. And it was really in many cases, Mitch, we did ship second quarter later, but it was within a customer's shipping window. So we haven't seen that any lack of confidence from our retail partners, and in some cases, again, very nominal. What we are seeing though is some real strength at a fall, and it's early days for sure, but we are seeing some really nice reaction to some key trending categories on the brand side. And those include sneakers, as we've mentioned, continue to grow. We've seen great results in some early flats and mocs coming through, and then sport inspired casuals are another great example. Finally, we've seen some interest in high shaft boots, particularly at Naturalizer and Sam Edelman. So it seems like the consumer is interested in new fall and is out shopping, and we're in a position to address that.

And just on the boot piece, can you remind us how big a part of your business that is in the back half of the year and what kind of performance you're lapping there from a year ago?

Yeah. We're -- it's a good question where we're, obviously, we haven't -- we had boot seasons that were disappointing in the last two. Our best information right now tells us it's about 28% of our Brand Portfolio sales in the back half. So -- and what we see about that is we -- from what I can see today, tall boots will be up slightly and then short boots will be down, but again, a manageable amount. Over on the Famous side, boots are obviously a much smaller penetration, about 14% of the fall season. So -- and we -- over on there, the only thing to report is that we are seeing some good results in actually some cozy type of products selling early, which is good to see.

And then on your third quarter outlook, I think, Jay, you said that Famous Footwear comp up 8% -- I'm sorry, high single digits in August. So what kind of comp assumption for the quarter is embedded in your outlook? What kind of Famous comp is in that sales range that you provided?

Yeah. I'll let Jack pick up for the comp reporting here.

Yeah. Hi, Mitch. Yeah. We expect a, what I'll describe as a modest positive comp in Q3 for Famous, which obviously drafts off of the strength of August. And -- but I will say, though, that the total reported sales for Famous in the quarter will be down mid-single digits as a result of this shift in the calendar with the back-to-school weeks and what we're anniversarying last year. So what you'll see is, I think, a modestly positive comp in Q3 for Famous, but a -- but sales -- total sales -- reported sales that are probably down low to mid-single digits.

Okay. And then how about Famous gross margin for the third quarter? I mean, obviously, it was down pretty substantially in 2Q. Are you also expecting it to be down in 3Q, or do you expect it to be better?

No. We're anticipating the gross margin for Famous to be down in the third quarter. And what I would say is when we look at sort of the year, we're still looking for gross margin improvement at the consolidated level, which is really being driven by Brand Portfolio.

And then one last one for me, just in terms of the revision to the full year sales guidance, because it sounds like in the quarter, there were three main issues. There was ERP, there was back to school, there was seasonal. So for the full year revision, does that basically take into effect kind of the 10 million to 15 million you lost on ERP, but for back to school, it just kind of -- back-to-school is kind of a wash, right? Because what you lost in three -- in Q2, you kind of pick up in Q3, and then, it's seasonal. And how much was the impact on seasonal? Can you kind of parse that out?

Sorry. We're just getting the number.

Yeah.

Okay. Maybe I've lost you.

No. We probably will have to pull it for you, but we did see sandals down on the Brand Portfolio piece of our business high-single digits in the second quarter. In Famous, they were actually, sandals were flattish. So we can pull the exact dollar amount as it relates to the myth there.

But it's fair to say that back-to-school, in terms of the rise full year guidance, that doesn't really reflect any changes to your thinking around back-to-school because what you lost in 2Q, you pick up in 3Q or is your overall view of back-to-school worse than what it was when you last gave the guidance?

No, I think it was -- it's actually -- we were pleased with where we saw we came out in back-to-school. And I think, Mitch, the other thing is that a lot of the key brands and trends that were there. We do see a go forward application of that, and we're looking to fuel those all the way through as we continue to serve the family throughout the fall season. So pretty pleased with what we saw. And obviously, a lot of these areas are things that were very strong for and known for. So those actually will help us as we move forward.

Okay. Thanks. Good luck.

Thank you.

Our next question is from the line of Josh Herrity with Telsey Advisory Group. Please proceed with your questions.

Hey, Jay and Jack.

Hi.

I just wanted to follow up a little more on a lot of moving pieces here in the quarter from an inventory perspective, like you mentioned, a carrier delay, the European implementation, seasonal weakness. Can you talk a little bit more broadly about demand trends by category? Obviously, athletic, stronger, but dress seasonal, and what that means for your inventory composition heading into the back half of the year relative to the overall promotional environment? And what it could mean for the gross margin in the back half of the year?

Okay. So I'll start with the brand piece, Josh. And we obviously see a lot of these key trends continuing here. The pivot to sneakers was done in the season. So we've already seen in the first couple of weeks of August that come through. I think we're reacting appropriately with the tall versus short dynamic in boots, and feel pretty good about the, what I would call the casual footwear business in the fall season. And we've made the appropriate, I think, adjustments to our dress business. So that feels pretty good for me. And then on Famous, again, we've seen some really strong brand results there. Nike business, very strong. Adidas, powering through very nicely. New Balance, Converse amongst many others, Birkenstock. So, we have a very good feeling about continuing to pivot into those brands. Famous is continuing to work with all their key strategic brand partners to bring in the very best from all of them to get the business to continue to all the learnings to keep going through and get more of that inventory in that the consumer is demanding. And on our brand side, we're seeing our target of 30% of our business coming through speed on receipts will continue, so that will continue to help us fuel all the good things that are working there too. And it's part of our dynamic model.

Great, thanks. And then I can just follow-up with the second question on the ERP implementation. That was entirely on the Brand Portfolio side, is that correct?

It was the Brand Portfolio side as well as our core financial systems.

And can you remind us where the ERP rollout or system stand for the Famous side, or if there's any other system implementations upcoming here?

Yeah. At this point, we put everything on hold for the future, Josh, just to make sure that we're 100% on this. So, we'll update everyone on our progress as we pull the whole company in. But for sure, we want to prioritize and get this to be, make sure that we're 100% right on this. And we'll announce more when we have more to say.

Thank you.

Thanks.

Thank you.

Our next question is from the line of Ashley Owens with KeyBanc Capital Markets. Please proceed with your question.

Hi, everyone. This is Chandana Madaka on for Ashley today. Thanks for taking our question. So first, I just kind of wanted to dig in a little bit more. You've already spoken to your trans quarter-to-date by month, but you mentioned back to school kind of started off a little bit late. Just wanting to ask why do you think that is? And then you've talked about how selling ticked up in August and some of the dynamics of marketing and promo bringing that up and more in line with your expectations, but just wanting to dig in further there.

Yes. I think we did see the consumer at Famous and -- has been very where now oriented. And so, I'm not surprised that back-to-school opened up a little late in terms of when they really needed to buy it is when they came out and shopped. And I think, so that was just one thing I think was consumer demand and people really prioritizing their spend in different ways and spending really when they needed it. The second thing we saw was obviously when we did go into full back-to-school and we did shift from last year's buy more, save more type of time promotion into this, we did see a good piece of traffic come through. And then, finally, we really turned on all of our marketing through new digital channels as well as standard channels to really maximize the time of this back-to-school period, which was primarily in August. So I think it was a combination of three things at once. And then, obviously, we had the inventory aligned to really take advantage of the traffic that came through.

Awesome. And then just as a follow-up, so you saw some door account expansion at Allen Edmonds. Just any early success that you can speak to or any other door expansion that's planned for the other lead brands, and maybe what are you hearing from wholesale partners?

Yeah. I think that, for sure, we're seeing some growth plans come through for the back half from both Sam Edelman and Vionic, as well as what we discussed with Allen Edmonds. We're seeing all categories of growth sneakers. The tall boots off to a good early start. And then also, I would say, overarching within this -- on our Vionic brand, we're seeing continued interest in comfort-oriented brands that really have a great experience for the consumer, gaining traction going forward. So I would say everyone is in the space of cautious optimism similar to Famous. We're both a wholesaler and a retailer here. And I think we share that vision, but we're really focused on getting the best of the product back into the consumer's hands through the best possible means. And so far, it seems like it's off to an optimistic start as we look at just early fall.

Thank you. At this time, I'll turn the floor back to Jay Schmidt for closing remarks.

Okay. Thank you. Before we close today, I would like to thank the Caleres team for their focus, hard work, and dedication during this quarter. Our team worked extremely hard to deliver while executing the future strategy that will continue to help us go forward. Despite the setback, we are confident in our long-term plans and growth opportunities. We look forward to a stronger finish to the year, and we will update you along the way. Thank you all for joining us this morning on the call, and thank you for your interest in Caleres. Have a good day.

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