2023-11-21 19:32:36 ET
Summary
- Caleres is a footwear company that manufactures and sells shoes under various brands.
- The company has been focused on streamlining its operations and improving efficiency through closing stores and focusing on critical brands.
- The valuation seems to reflect a poor faith in further improvements, which I see as a good baseline scenario for the company's investors.
Caleres, Inc ( CAL ) is a footwear company that manufactures shoes under numerous brands and sells shoes through multiple websites in addition to the Famous Footwear retail chain. The company’s mostly mediocre financial performance has resulted in a poor stock performance in the past ten years, but as Caleres is focused on streamlining the business, the future could potentially prove to be far better for shareholders. The stock’s valuation doesn’t seem to expect very much from Caleres’ future performance, which I also see as a reasonable expectation before Caleres proves the strategy’s effectiveness with improved long-term earnings.
The Company & Stock
Caleres manufactures and sells footwear. The company produces shoes for self-owned and licenced brands. Caleres’ self-owned brands include lead brands Sam Edelman, Allen Edmonds, Naturalizer, Vionic. In addition, the company has seven smaller portfolio brands with names such as Veronica Beard, Vince, Dr Scholl’s, and FrancoSarto. The company sells self-manufactured and third-party shoe brands through the Famous Footwear retail chain. In addition, Caleres sells footwear through a number of websites named after the company’s brands.
The company has tried to refocus its operations significantly as told in Caleres’ 2023 investor day presentation – Caleres has exited four brands, closed 150 specialty stores and 100 footwear stores, and restructured teams to improve the company’s operations into a vertically integrated entity. After a mostly mediocre financial performance, I believe that the strategy is very welcomed – Caleres has managed to reduce inventories and streamline the business for a better performance.
Caleres’ stock performance hasn’t been very good on a long timeframe – the stock has appreciated a total amount of less than 6% in the past ten years. The company does also pay out a stable quarterly dividend of $0.07, making the yield quite low at a figure of 1.03% at the time of writing.
Ten-Year Stock Chart (Seeking Alpha)
Financials
When excluding fiscal year 2020 revenues that were weakened by the Covid pandemic, Caleres’ revenue trajectory has been stable. The company has mostly been on pace with inflation with a compounded annual growth rate of 2.4% from FY2002 to FY2022:
Author's Calculation Using TIKR Data
The growth has halted in fiscal year 2023 so far as Caleres’ strategy of refocusing operations and closing down inefficient parts of the business is proceeding. Also, discretionary spending has lowered in the currently challenging macroeconomic situation; in total, Caleres’ revenues decreased by -7.8% in the first half of FY2023. With a longer timeframe, the revenue history has mostly been very mediocre growth.
Caleres has historically achieved a very thin EBIT margin – from FY2002 to FY2019, the company’s average EBIT margin has been 4.2%:
Author's Calculation Using TIKR Data
After the pandemic’s negative impact on Caleres’ operations, the company has been able to recover its EBIT margin into a higher level than the company has been able to achieve historically. The currently achieved higher level in my opinion represents Caleres’ future margin level better – the company’s strategy has yielded some results so far. I wouldn’t expect too much further operating leverage in the future as a baseline scenario, though. After a long period of mediocre financials, I would rather update my perception of the margin level as Caleres proceeds further with the strategy.
Weak Brands
Caleres' long-term growth rate has been quite poor - the already modest long-term growth of 2.4% includes select acquisitions . I believe that the revenue performance is partly a factor of a too highly diversified portfolio of brands; Caleres has already exited four brands, but still operates eleven shoe brands under lead and portfolio brands. The high number of brands creates challenges in creating a well-known brand imago with a reasonable cost level. In comparison to leading brands such as Nike, Caleres' brands seem very weak. As a result, Caleres seems to be losing the battle against other shoe manufacturers. For example, Designer Brands (DBI) has achieved a revenue CAGR of 3.8% in the past nine complete years, and Shoe Carnival (SCVL) has a CAGR of 4.0% from FY2013 to FY2022, compared to Caleres' figure of 1.9%.
As told earlier, Caleres has closed down a significant number of stores resulting in the recently weak revenue performance. Although closing down unprofitable stores is very much a welcome sign, it should also worry investors - shrinking operations don't often result in a better long-term performance. The store closings in my opinion also signal a deteriorating brand value. I don't foresee the financials to turn around completely at least in the medium term - investors should brace themselves for mostly weak growth in the future as well, although with likely higher margins than in the long-term history.
Reported Q3 Results
Caleres reported its Q3 results on the 21st of November. The company's revenues were $761.9 million compared to analysts' expectations of $770.1 million. The reported figure corresponds to a year-over-year decline of -4.6% - better than the H1 decline of -7.8%, but still a poor performance.
On the other hand, the reported margins stayed stronger than expected - Caleres reported an adjusted EPS of $1.37, compared to an estimate of $1.30. In total, the reported result was mostly as good as expected. The figures varied quite little from analysts' expectations. The reported EPS being higher is in my opinion a good sign, although not very meaningful at this point.
Valuation
Reflecting investors’ poor faith in Caleres’ streamlined business, the stock trades at a low forward P/E multiple of 6.2, significantly below the ten-year average of 10.8:
The P/E multiple alone doesn’t contextualize the valuation very well. To estimate a rough fair value for the stock, I constructed a discounted cash flow model in my usual manner. In the model, I estimate a mediocre financial future for Caleres, quite in line with the company’s historical performance – for fiscal year 2023, I estimate revenues to decrease by -5%, representing a Q4 performance that's slightly better than the reported Q3. After the year, I estimate a partly recovery in revenues with an estimated growth of 3%, that slows down into a stable growth rate of 2% into perpetuity.
As for the revenues, I don’t see significant drivers for a significant change in margins. For fiscal year 2023, I estimate a margin of 7.4%, in line with Caleres’ guidance. After the year, I estimate the margin to rise into 7.5% in fiscal year 2026, representing a mostly insignificant further margin expansion. The company’s cash flow conversion is quite good, but Caleres does have interest expenses related to leases worsening earnings.
The mentioned estimates along with a weighted average cost of capital of 15.92% craft the following DCF model with a fair value estimate of $28.46, around 5% below the stock price at the time of writing. The stock seems to be priced for a stable future performance that’s mostly in line with FY2023 financials. Caleres could prove to improve the financials above my estimates, potentially making the stock intriguing, but for the time being I wouldn’t hold such a scenario as a baseline.
The used weighed average cost of capital is derived from a capital asset pricing model:
CAPM (Author's Calculation)
Caleres has progressed in the company’s balance sheet deleveraging – the company doesn’t have interest-bearing debt intended for financing purposes, as the company’s interest expenses seem to come from capital leases. It seems to be in Caleres’ strategy to keep the balance sheet deleveraged – I estimate a long-term debt-to-equity ratio of 0% for the company.
On the cost of equity side, I use the United States’ 10-year bond yield of 4.47% as the risk-free rate. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Caleres’ beta at a figure of 1.87 – as recent quarters have demonstrated, the company’s operations are quite cyclical. Finally, I add a small liquidity premium of 0.4%, crafting a cost of equity and WACC of 15.92%.
Takeaway
Caleres’ focus on improving operations has seemingly resulted in higher margins than the company has historically achieved. As the company has closed down a significant number of stores for better efficiency, the revenues have still performed quite poorly with decreases in FY2023 so far – although a part of the decrease is likely a result of a poor macroeconomic sentiment, Caleres’ financials still don’t seem fantastic to me. The company's brands' value seems weak, in my opinion signaling a mediocre future growth performance. The stock is priced quite low though, expecting no further improvements. For the time being, I believe that the assumption of further weak financials is a good baseline although the company could surprise investors in a positive way. Before Caleres proves better financials, I have a hold rating for the stock
For further details see:
Caleres: Little Is Expected