In general, I try to stay away from the clothing and apparel market. I think it’s very competitive, with low margins, and you’re stuck dealing with fickle and ever-changing consumer attitudes. But there is one niche in this space that I find intriguing. And this is in the shoe market. One company that I have seen do extremely well over the past couple of years in this space is Caleres (NYSE:CAL), a specialty retailer best known for its ownership of the Famous Footwear brand.
Since I last wrote a bullish ITEM relative to the company in October of last year, shares are up just 2.7% compared to the 19.8% gain seen by the S&P 500 over the same time period. But I’ve been following the company for longer than that. Since the year OWN first bullish article in the company in March of the same year, shares have increased by 29.4% compared to the 0.4% increase of the exposed S&P 500. So, in the grand scheme of things, it seems to be doing well. The big question investors would be wise to ask, however, is how much additional upside can be warranted after such a significant amount of growth in such a short period of time. Given how cheap the stock is, not only on an absolute basis, but relative to peers, I’d argue it’s still a solid prospect at this time. Though investors would be wise to keep a close eye on the fundamentals as the picture is changing in a negative way for the firm.
The picture is getting worse, but that’s okay
When it comes to the retail shoe market, Caleres is a pretty big company. According to management, the firm boast a 22% market share in the shoe chain space, with that market share rising to 28% when focusing solely on children’s footwear. The company boasts 860 stores in operation and generates a rather impressive 14% of its revenue from online activities. In recent quarters, the growth achieved by the company has been under pressure even though the financial performance up to the current fiscal year has been very solid.
IN first half of fiscal year 2023, for example, the company reported revenue of $1.36 billion. That’s 7.8% lower than the $1.47 billion the company reported at the same time last year. Management blamed the decline on ‘cautious consumer spending’ that resulted in a reduction in traffic at its retail stores. In fact, comparable store sales in the first half of this year were 6.3% lower than they were at the same time last year. This decline in revenue is something the company will likely continue to deal with for the rest of 2023. I say this because management is currently forecasting revenue of $2.80 billion for the year. That’s down from $2.97 billion generated in 2022. As bad as that is, it gets worse when you consider that this year will be one of the years in which the company has an extra week of operations. If it weren’t for that, revenue would be even lower year over year.
After all, the picture was even worse. Net earnings fell from $101.7 million to $68.7 million. Falling revenues certainly didn’t help. However, the company was also negatively impacted by an increase in selling and administrative costs from 36% of sales to 38%. This increase, according to management, was driven mostly by the depreciation of expenses caused by the decrease in net sales. Unfortunately, other profitability indicators for the company have also deteriorated. Operating cash flow increased from $27.3 million to $125.2 million. But if we adjust for changes in working capital, we see a drop from $136.5 million to $104.2 million. Meanwhile, EBITDA for the company fell from $165.8 million to $129 million.
If management is correct, earnings per share this year should be between $4.02 and $4.22, while adjusted earnings per share should be between $4.10 and $4.30. I would argue that adjusted earnings are a more appropriate measure of company success. At the midpoint, that would translate to $144.1 million in earnings. No guidance was given when it came to other profitability metrics. But based on my estimates, adjusted operating cash flow should be around $193.6 million while EBITDA should come in somewhere around $218.9 million.
Using these estimates, I’d like to show you in the chart above. In it, you can see how stocks fare both on a forward basis and using data from 2022. Obviously, stocks are more expensive on a forward basis because of the aforementioned issues. But in the grand scheme of things, the stock still looks pretty attractive. In the table below, I also compared the company to five similar firms. On both a price-to-earnings and operating cash flow basis, only one of the five companies was cheaper than Caleres. Using the EV to EBITDA approach, this number increases modestly to two.
|company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Shoe Carnival (SCVL)||6.8||9.6||3.8|
|Boot Barn Holdings (BOT)||13.0||7.1||8.2|
|Designer Brands (DBI)||4.9||2.1||4.0|
|Skechers USA (SKX)||14.5||6.5||7.9|
|Steven Madden (Shoot)||15.3||9.2||10.0|
Of course, it’s important to note that conditions can change. And on November 21 of this year, management is expected to announce financial results covering the third quarter of the company’s 2023 fiscal year. This would be the ideal time for a change to be announced if it is going to happen. Fortunately, we have forecasts not only from analysts, but also from management. Analysts, for starters, BELIEVE this income will reach about 772.1 million dollars. That wouldn’t be surprising when you consider that management is predicting a revenue decline in the low single-digit range from the $798.3 million the company reported in last year’s third quarter.
In terms of earnings, analysts are forecasting earnings per share of $1.28 and adjusted earnings per share of $1.32. That would compare to $1.08 and $1.15, respectively, that the company generated in the same quarter last year. This is interesting because I would not expect a decline in revenue to correspond with higher profits. And yet, even management remains optimistic. They forecast earnings per share between $1.25 and $1.30, with adjusted earnings coming in between $1.30 and $1.35 per share. In the table above, you can see what each of these valuations would translate to based on the company’s current share count. Management did not provide guidance on other measures of profitability. Neither does the management. But the important ones that investors should pay attention to when earnings come out can be seen in the above table.
Based on the data provided, I understand why investors may be weary of Caleres. Revenue, earnings and cash flow have taken a beating recently. In the near term, this could continue to weigh on the stock. But the good news is that the stock is still very cheap, and management believes it can continue to grow earnings through 2026 at an annual rate of between 3% and 5%, with earnings per share growing at an annual rate over the same time period. between 11% and 13%. Even if half of that growth happens, the stock is cheap enough to warrant an attractive upside. And because of this, I have decided to keep the business rated ‘buy’ for now.