Good morning. And welcome to the Caleres Third Quarter 2024 Earnings Conference Call. My name is Daryl, and I'll be your conference coordinator. At this time, all participants are in listen-only mode. A question-and-answer session will follow the prepared remarks [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 of Strategic Communications and Corporate Development. Please go ahead.

Thank you, Daryl. Good morning. And thank you for joining our third 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 several risks and uncertainties. Actual results may differ materially due to various risk factors, including those 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 our operating results, we will be providing and referring to certain non-GAAP financial measures. Additional details on these measures as well as others featured in today's earnings release and presentation are available at caleres.com. The company undertakes no obligation to update any information discussed in this call at any time. Joining me today are Jay Schmidt, President and CEO; and Jack Calandra, Senior Vice President and CFO. Our call will begin with prepared remarks followed by a Q&A session to address any questions you have. With that, I'll turn the call over to Jay.

Thank you. And good morning, everyone. As we reported earlier today, our third quarter saw progress toward our strategy, highlighted by the brand portfolio reporting growth, Famous Footwear delivering positive comp store sales and both segments increasing market share. However, our earnings were clearly below our expectations. There were a number of challenges in the quarter that impacted our results; we saw a soft boot sales in both segments of our business; we had discrete issues with late receipts of trending athletic product at Famous Footwear; we had a credit issue associated with one customer in the brand portfolio that resulted in lower shipments; and finally, our China business has softened. While this was not the result we wanted, there were several areas of strength on both sides of our business that leave us cautiously optimistic for the future. Our brands and products are resonating with consumers. We are gaining market share in both segments of our business. And we remain confident in our growth strategies and long term vision. In total, for the third quarter, sales declined 2.8% year-over-year and we reported adjusted earnings per share of $1.23. Now let's turn to our operating segments. Brand portfolio sales increased approximately 1%. Our lead brands outperformed our portfolio brands with wholesale and owned dot com both showing modest growth versus last year. We were encouraged to see a return to growth and pleased to report that the issues that we had last quarter related to our systems implementation did not impact this quarter. Additionally, our brand portfolio gained market share according to Circana during the quarter, both in total and in women's fashion footwear. We continue to see robust demand for new products with momentum in fashion sneakers. In fact, sneakers and sport represented over 30% of retail selling for…

Thanks Jay. And good morning, everyone. During today's call, I'll review our third quarter performance and share our revised guidance for the full year. Please note my comparisons to last year will be on an adjusted basis. Starting with Q3 results, sales were $741 million, down 2.8%. On a dollar basis, sales were down $21 million, which included an unfavorable calendar shift of about $29 million at Famous. As Jay mentioned, weak seasonal demand in the boot category impacted results in both segments. Brand portfolio sales were up 0.7%, primarily driven by our lead brands. Owned dot com sites were up 1%. Drop-ship improved from Q2 and was about flat versus last year and total wholesale saw a modest uptick. Famous sales were down 4.8%. Comparable sales, which adjust for the calendar shift, were up 2.5%. Strong results in athletic and kids offset weak sales in boots. Back to school came later in the season but in total was in line with our expectations. Comparable sales were up 9% in August and down low single digits in September and October. Consolidated gross margin was 44.1%, a 55 basis point decrease and was driven by lower margin in Famous, partially offset by a slightly higher margin in brand portfolio. Brand portfolio gross margin was 43.8%, up 15 basis points supported by a favorable channel mix and higher initial margins. Famous gross margin was 42.9%, down 130 basis points. This decrease reflects a shift to more days in BOGO versus buy more, save more. However, as previously noted, the shift was gross profit accretive to what we initially saw from the buy more, save more promotion. Softer than anticipated performance in boots also impacted clearance margins. SG&A expense was $269 million or 36.3% of sales, up 30 basis points. SG&A declined $5…

[Operator Instructions] Our first questions come from the line of Ashley Owens with KeyBanc Capital Markets.

This is Chandana Madaka on for Ashley Owens this morning. So I just wanted to ask just broadly, your year into your long term plan that you outlined at Investor Day. Can you just provide more thoughts around the confidence levels, how should we be thinking about top line growth and scaling to that in next year and beyond? Is there any shift in the makeup there? And then you spoke to EPS expectations that are now expected to take a bit longer. So from an OpEx perspective, is there anything to call out on what's driving the adjustment? Any bucket that's contributing more?

So as you know, we generated more than $4 of EPS over the last three years and continue to believe we have the brand, strategies, capabilities and people to get back to that earnings power. As Jay said, this year has clearly been a setback. And I really think without making excuses there have been a confluence of factors that have impacted this year. One thing I would say is that the fashion segment of footwear where we obviously play pretty heavily has been softer than anticipated from the forecast that we were provided in the beginning of the year, and the seasonal business has been particularly tough. As you know from our second quarter call, we also had disruption and distraction from our ERP upgrade and that had a pretty big impact on Q2. As Jay mentioned that impact is now behind us. And then we have been making investments, strategic investments to drive future growth that we feel very confident in and particularly around international and some of our marketing investments. That said, it's going to take us longer to achieve the goals we communicated last October and we can provide I think a further update on our fourth quarter call. But we feel like we've got, again, all of the capabilities, tools, brands and people to get our earnings back over that $4 level.

Just as a follow-up. I wanted to ask if there's anything more specific that you could discuss around the dynamics in China. What do you think is contributing to the softness there, is it more broadly macro and consumer spend? And just speak to your confidence in the region as you're investing and opening more stores there.

We still believe that we have a significant growth opportunity in China and the rest of the world. While we're somewhat more cautious on China in the near term, we believe it is an important market for us with significant long term opportunity. And we are looking at a more balanced approach with other markets being important well, as well such as the Middle East and EU. And even with our JV partner, we're kind of looking at more moderate growth but still growing there. And then also that JV partner is expanding into Southeast Asia as well. So we think we have a good plan there but probably just our original China plan was probably too aggressive coming out of the gate.

Our next question comes from the line of Laura Champine with Loop Capital Markets.

If I look at the shifts in the guidance, it doesn't seem to be top line as much as it is op margin, and it's our -- perhaps that's mostly on gross margin. How much of this is just more markdowns to clear inventory in Q4? And how impactful, if it's impactful at all, is the [Technical Difficulty] [custom] called out in your press release today?

So just in terms of as we look to Q4, we do expect a gross margin decline for the total company. That will be driven by a gross margin decline at brand portfolio where we plan to address the current but slow moving inventory that we talked about. And then in terms of the credit issue just a little background on that. We chose to suspend shipments to a customer given their aged receivables balance and their latest credit rating. We do expect continued challenges in Q4 and we have factored that into our guidance. And just rest assured that the age receivable balance was appropriately reserved for at the end of the third quarter, again, based on that value and that credit rating.

So that seems like more of a top line issue, and I wouldn't expect a big markdown on receivables to impact margins in Q4. Is that fair?

On the credit issue specifically?

Right, exactly.

Yes. I mean, we do to the extent that we do any sales there, we have to also put up a pretty significant reserve for potential credit losses. So there is a bit of that offset that goes into the earnings flow through of that account.

And any framing you can give us around how large that customer is as a percentage of your wholesale business?

It's pretty small. And I can say as we think about the things that caused us to miss our top line in the third quarter, in the first one and the most significant one is the boots issue in both segments that Jay talked about. And then I think after that in terms of order would be the athletic, the late deliveries of the athletic product that we didn't receive and then the credit issue would come below that.

So it sounds like you listed them in the press release and the order of their relative impact, which brings me to my final question. How large is China as a percentage of total sales at this point?

No, it's less than -- I mean, the whole international piece is less than 5% of our total and China is the largest part of that but there are others there. So it is relatively low. It's just that our plan was more aggressive than what we delivered against and that's where it did catch us up on third quarter.

Our next questions come from the line. If Mitch Kummetz with Seaport Research.

I just want to start on 4Q, the implied guide there. Looks like kind of maybe the midpoint of the range sales down, I think 6%. Jack, can you remind us what the sales impact of the 53rd week was last year, maybe in total, and then how that's split between Famous and BP? I assume it's mostly, if not all, on the famous side. And when you look at that implied sales outlook, what are you assuming in terms of BP growth in the fourth quarter and then also Famous comp?

So as a reminder, the impact of the 53rd week last year was $25 million in total for the company. And you rightly point out that most of that was in Famous, it was $18 million for Famous and $7 million for brand portfolio. So as we look for -- look at sales, going forward into Q4 on a reported basis, so not adjusting for the 53rd week, we expect both segments to be down mid single digits. Adjusting for the 53rd week, we expect Famous to be down slightly but BP still to be down sort of in that mid single digit range, given the impact of the 53rd week wasn't as significant and the plans that we have to make sure that we get through some of that current but slow moving inventory. So we finish the year clean from an inventory perspective.

And on the Famous down slightly adjusted, I could probably try to back into some sort of comp assumption there. But maybe you could save me the trouble and kind of let me know what you're thinking in terms of comp on that business.

So for the Famous business, we're looking at just a marginally positive comp, so about -- call it about a 1 to 1.5 comp for Q4, which is obviously below where we finished in Q3.

And then Jack, I think you mentioned in response to one of Laura's questions that gross margin, you expect to be down in the fourth quarter. It looks like again, if I kind of take the midpoint of your guide, it looks like maybe op margin down around 70 basis points in 4Q. Can you say how much you expect gross margin to be down? And I assume maybe you're assuming some SG&A deleverage as well.

So really in terms of the op margin decline in Q4, more of it is being driven by gross margin. We do -- just in terms of SG&A, we have the $12 million benefit from last year's 53rd week. So obviously, that's coming out of Q4. We do have some additional savings given the work that we've been doing. But just given what the sales are coming down, we think there is likely some deleverage in SG&A in the fourth quarter. So that reduction in operating margin really coming from both levers but I would say more so on the gross margin.

And is your Famous comp your quarter-to-date, I don't know, can you say anything about quarter to date at Famous? Is that sort of in line with that sort of plus 1% to 1.5% or is it below that and you expect that to pick up as the holiday season kicks in some more?

Yes, I think it is running a bit below that. But because we have this compressed calendar for holiday, what we're seeing certainly so far in the month of November is some very strong comps with that compressed holiday shopping period. So what we did was we compared sort of how we expect the quarter to build to the last time the calendar was like this, which was in 2018 and that gives us confidence in that forecast.

And maybe just a last one. On the boots, you said it was the biggest negative impact on the third quarter. Is there any way to quantify that? I would imagine boots are more significant in 4Q. So are you expecting the impact to be more significant in the fourth quarter than the third quarter?

We're seeing -- boots did -- it was about two thirds of our drop for the third quarter. We are -- looking today at seeing the boot sales decline at least from what we know so far to be similar to what we've experienced in third quarter. And obviously, it's just starting to turn very cold. So we'll see if that gets improved. But right now, we can only guide on what we know.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about the brand portfolio, what were the biggest brands where there was a rate of change, what decelerated, did anything accelerate in brand portfolio? And then if you think of the Famous Footwear business, what are you seeing there in terms of the health of that consumer? And it sounds like the FLAIR stores still outperform the base. Is it still 43 you're looking for this year? And just lastly, with the promotions in this current fourth quarter, how do you expect them to be different? You mentioned BOGO before. What's adjusting in the promotions in Famous Footwear or in brand portfolio as you go forward?

So starting off with what's in the brand portfolio, as what's called out the sneaker business. Fashion sneakers were very good and now represent 30% in the quarter. We had significant trends in footwear that were positive, such as flats, Mary Jane, slingbacks. And then also we did see a -- although, it's a smaller category for us within Boots, which got us to that better performance in tall boots, it was really on tall heel boots, which were very strong in the quarter. And both Sam Edelman and Naturalizer benefited from those trend items. Fast forward over to famous footwear, Athletic continues to really dominate right now. And these very strong athletic brands that we've reported upon that Famous does have are continuing to trend across the women's, men's and kids part of the business. And then across the board, it really was boots that just -- this particularly short casual that was the most concerning part and did cause us some pain here. Moving forward, we still see in -- the consumers are still wanting the brands that they desire and that's really whether they're value or full price, they're still really looking at the brands and the products that they want and continue to demand. So we're continuing to see that. And then finally the FLAIR stores are working. We're very happy with them. We're only going to open one more store. So we have 32 open now so we'll end with 33. And then right after the '25 plan, we'll continue to open more. We did delay some of those just so we could keep the stores open and get the most sales through the holiday period.

And then just on that promotional part, Jay, how are you thinking about that, whether it's BOGO [Indiscernible] how do you think of that as we go through the holiday season? Does it change at all?

So in terms of Famous, we have a promotional calendar, which is very similar to last year where we did do a lot of BOGO promotion. And so we'll continue that this year. So it should be pretty comparable year-over-year. I think where you'll see more markdown activity, promotional activity is on the brand portfolio side. Again, as we look to exit 2024 with a really good position on inventory. And so that's where I think you'll see some more promotions and that's where we have factored in some more gross margin, some more gross margin dilution in that business in Q4.

And it will be more clearance driven in that category, particularly in season.

That's right.

And just one last thing. How much was the industry down versus your sales, was there a change in industry trend?

So the total footwear industry in total was down about 1% [Multiple Speakers] in the quarter it was down 3%. And I think what we've seen is that the fashion segment of the industry has been below that and obviously that's where we have a decent amount of exposure. So I would say both the overall footwear market and then I think the segments that we really compete in have been pressured.

Thank you. That does conclude our question-and-answer session. I would now like to hand the call back to Jay Schmidt, President and CEO for closing remarks.

Okay. Thank you. Before we close today, I would like to thank the entire Caleres team for their focus and dedication during this quarter and for the whole year. Our team worked extremely hard during 2024 while laying the groundwork for a stronger 2025. Thank you all for joining us this morning and thank you for your continued interest in Caleres. Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.