Should Caleres (CAL) Investors be Worried About DSW?

Caleres (CAL) is currently priced at $19.49. Formerly referred to as the Brown Shoe Company, Caleres is a wholesaler and retailer of footwear. Most people have seen Caleres footwear while perusing online e-tailers and shopping at brick-and-mortar stores. The company’s sneakers are available at Famous Footwear stores as well as myriad websites.

Economic concerns stemming from President Trump’s trade war tariffs have sent the stock lower in recent months. Like most other retailers, Caleres is a cyclical business, partially dependent on US GDP growth. If the country’s GDP growth plateaus or decreases, consumer spending typically follows suit and the likes of Caleres take a major hit.

Though there is certainly plenty of economic uncertainty at the moment, there is reason for Caleres investors to maintain hope.

Caleres Jumps from $15 to $19

Caleres skyrocketed $4 earlier this week after reporting better-than-expected earnings results. These results were unexpected as the majority of investors are concerned with the impact of tariffs on the likes of Caleres.

The footwear company’s earnings and revenue for the second quarter exceeded the street’s expectations. Caleres’ brand portfolio revenue increased by double digits in the quarter. Company revenue for this quarter came in slightly higher than $750 million, representing a 6.5% hike on a year-over-year basis. Same-store sales at the company’s Famous Footwear stores are slightly up to boot. The company’s Non-GAAP earnings per share were 62 cents compared to 59 cents in the same period in 2018.

More important is the fact that Non-GAAP earnings per share were four cents higher than analyst expectations. However, Caleres’ gross margin dropped nearly a full percentage point compared to the same quarter in the prior year, dropping from 41.5% to 40.7%.

A Look Ahead

Caleres executives anticipate aggregate yearly revenue right around the $3 billion mark. The company’s brand portfolio is anticipated to boost sales by a percentage in the low-to-mid teens. Same-store sales are expected to level out or end up in the low single digits. Non-GAAP earnings per share for the year are forecasted to fall in the range of $2.35 – $2.45, representing a nearly 10% increase on a year-over-year basis.

However, it must be noted this figure has been adjusted to not account for the 16 cents per share worth of expenses applicable to acquiring and selling brands. In other words, developments in the trade war probably won’t be enough to slow Caleres. The small-cap stock has gotten many of the tariff-related losses back through prudent management strategies.

How the Payless ShoeSource Implosion Impacts Caleres

Payless ShoeSource closed all of its stores in the United States a couple months ago. This is fantastic news for Caleres investors. Caleres will undoubtedly experience a hike in sales in the upcoming year. After all, Payless had in excess of 2,000 stores in the United States.

If Caleres is able to beat out DSW (NYSE: DBI) for this pool of customers in the months and years ahead, the stock will surely benefit. The closure of Payless is somewhat shocking as the company seemed to be somewhat financially healthy after emerging from bankruptcy filed two years ago. The bankruptcy was pinned on antiquated inventory management tech. Payless ended up with a glut of shoes that had to be significantly marked down to make room for more inventory.
Hopefully, Caleres learns from Payless’s mistake and avoids a similar margin destruction in the years to come.

In reality, managing inventory is only one challenge in the uber-competitive footwear market. This market is extraordinarily fragmented. Compounding the challenge of selling sneakers, shoes and boots in 2019 is the fact that fewer people are heading to local malls to shop. Though Caleres can make up some of the lost sales at brick-and-mortar stores through its myriad online channels, the bottom line is the footwear market will likely always be extremely competitive.

Losing Market Share

It is possible DSW will scoop up more of the market share lost by Payless than any other footwear merchant. DSW was hampered by slow sales a few years ago, yet sales eventually returned to the usual levels and even accelerated this past year. DSW’s retail stores in the United States enjoyed a comp sales spike of more than 7% last year alone. DSW’s total sales increased 10% on a year-over-year basis. The question is whether DSW will absorb more of the former Payless customers or whether Caleres can acquire the bulk of these customers.

It appears as though Payless customers will lean more toward DSW simply because the company’s off-price business model focused on self-service proves more appealing to those who used to shop at Payless. It is clear Caleres will have an uphill battle to acquire the business of those who used to shop at Payless.

Buy, Sell or Hold?

Hold. Caleres might benefit from the exit of Payless in the short-term, yet there is no guarantee the company will continue to thrive in the years ahead. The bottom line is the footwear market is absurdly competitive. Furthermore, more and more customers are becoming more comfortable with ordering footwear online, making it that much more difficult for the likes of Famous Footwear to retain market share.

Regards,

Ethan Warrick
Editor
Wealth Authority

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