Description

Description

Caleres is a diversified footwear retailer, owning the Famous Footwear brand of stores (870 stores) along with the Brand portfolio which is made up of multiple mid-to-high end footwear brands, skewed to female shoppers and sold direct, through mid-to-high end department and independent footwear stores as well as through the Famous Footwear stores. Woodrow did a nice writeup on the stock in May of 2019 but there have been some material changes over the past 3 ½ years, which we address below.

Famous Footwear generates approximately $1.7bn of revenue through 870 retail locations and a growing e-commerce web presence.  Famous sells mostly well-known, popular national brands of athletic, casual and fashion footwear at a value.  Famous also sells footwear from company-owned and licensed brands, making up about 5% of sales.   Company believes their average demographic is $90k-$100k, skewing to a more resilient, higher end consumer.

Source: CAL investor presentation

Differentiating from independents and other footwear peers as a destination, Famous has held onto its solid relationship with Nike.  Nike has pulled out of a significant # of independent retailers as well as some large peers, including DSW, providing market share opportunities for Caleres for consumers looking for Nike.

Famous spent multiple years culling real estate but has now stabilized its retail footprint while growing sales online.  Famous holds solid mid 40% gross margins and low teens operating margins.  Regarding owned brands, CAL is very focused on increasing owned brands as a % at Famous.

Source: CAL investor presentation

Brand portfolio sells owned and licensed footwear on a wholesale basis to retailers, direct to consumer through branded stores and e-commerce channels.  Brand names include Sam Edelman, Vionic, Naturalizer, Dr Scholls Shoes, Allen Edmonds, Lifestride, Franco Sarto, Ryka, Vince, Bzees, Zodiac and Veronica Beard.   The Brand portfolio also operates 86 small footprint stores, mostly Allen Edmonds and Sam Edelman. 

Starting before Covid, the company sold or closed multiple brands within the Brand portfolio which were underperforming and/or losing money.  The remaining portfolio is now much healthier with a 37% gross margin, solid for a wholesale footwear business, along with high single digit operating margins and solid cash flow generation.

Investment opportunity

The attractiveness of the opportunity is the materially mispriced equity generates significant free cash, especially relative to retail and other footwear peers.  For 2022, Caleres has guided to EPS $4.30-$4.40.  The stock sold off on earnings as November started weak for most of the retail industry.  Caleres chose to guide quite conservatively, with Famous assumed to have revenue down high single digits and Brand portfolio up mid-single digits.  We expect final Q4 results to be nicely above guidance as a normal seasonal pattern recovers into Christmas.  We also expect solid free cash flow generation in Q4 as inventory should continue to move lower, close to matching annual sales growth after starting the year up significantly on logistics issues that hit all of retail.

Our forward estimates for 2023 assume minimal sales growth and assume that the consumer continues to be under some pressure.  In spite of the potentially weaker consumer environment, Caleres should still experience a few tailwinds on the cost and cash flow side.  Expensive and difficult logistics cost Caleres revenue, margin and cash flow in 2021 and early 2022.  Lower transportation/shipping costs should help offset a potentially more promotional sales environment.  Shrinking inventory should drive better working capital management.  Importantly, given a very low maintenance capex burden, Caleres should generate significant excess cash.  The cash will be deployed in an accretive way, a combination of debt repayment and share repurchase.   

Cap Structure

Caleres should end the year with about $225mm of net debt all on its revolver.   We expect debt to be fully paid off or termed out over the next 18 months.  The company can be patient for a more favorable rate environment.  By paying off debt completely, Caleres could save $.40-$.50c from interest expense, which would also help the equity multiple.  The company could also continue repurchasing shares, as the company has repurchased approximately 7% of shares through 3 quarters, as mentioned.  We would expect a combination of debt repayment and share repurchase to benefit shareholders.

Source: CAL investor presentation

We believe the equity is too cheap and, in our view, makes for an attractive target for private equity. While not essential to our thesis, in the medium term, the company could just effectively continue to take itself private slowly via share repurchase. Note that to-date, the company has purchased 2.6mm shares, representing roughly 7% of the total shares outstanding and has 6.4mm shares remaining on their repo authorization.

Source: CAL Nov 22, 2022 investor update

Upside/Downside

If we assume Caleres can just trade to the mean of non-growth shoe retailers such as public peers such as Shoe Carnival, Genesco, Foot Locker, then Caleres would have significant upside.  At a PE of just 7x-8x 2023, Caleres would show 80% upside.  At an EV/EBITDA multiple of 5x with a bit of upside to #s, the stock would show similar upside.

Catalyst

- Private label/vertical integration mix shift

- Delevering and company buybacks

- Continued execution

- Reasonable PE acquisition candidate