Generally speaking, I tend to stay away from companies dedicated to the clothing and apparel markets. But I do seem to have a soft spot for those dedicated to shoe wear. I can’t really explain why. I do know that, from time to time, some of the companies in this space can be found trading at attractive levels. Even when sales might be depressed, they can generate attractive bottom line results. When added to how cheap the stocks often are, the upside for shareholders can be rather attractive as a result.
Perhaps the perfect example to point to in this regard is Caleres (NYSE:CAL). Though most people probably don’t know what the business does by its name, they likely are aware of its most valuable asset, which is Famous Footwear. Recent financial results achieved by the company have been rather mixed. But that has not stopped the firm from generating some meaningful upside. Since I wrote a bullish article about the business in November of last year, shares have seen upside of 17.3% at a time when the S&P 500 has generated a return of 9.9%. Despite the mixed results, shares still remain attractively priced, both on an absolute basis and relative to similar firms. This leads me to believe that further upside exists from here.
A look at recent data
In the last article that I wrote about Caleres, we only had data covering the second quarter of the 2023 fiscal year. That data now extends through the third quarter. During that quarter, revenue came in at $761.9 million. That represents a decline of 4.6% compared to the $798.3 million generated one year earlier. It’s worth noting that the biggest weakness the company had involved its Famous Footwear segment, with revenue dropping by 6.7% from $482 million to $449.8 million. Some of this decline was driven by a drop in the number of stores from 876 locations to 862. However, the firm also reported a 6.9% decline in comparable store sales. Management attributed this to ‘softening consumer demand trends’, though the company did say that the kids category, driven by a strong back-to-school selling season, helped it meaningfully.
Given the low margins associated with retail in general, you might think that a drop in revenue would have brought with it a decline in profits. However, net income actually rose from $39.2 million to $46.9 million. A good portion of this increase came from the company’s Brand Portfolio segment, with operating earnings climbing from $22.3 million to $38.2 million. The segment did benefit from a rise in store count from 89 locations to 96. But it also saw a jump in its gross profit margin from 37.9% to 43.7%. That increase was thanks to a reduction in inbound freight costs, lower inventory markdowns, and higher margins that it was able to capture on its merchandise thanks to the stronger demand of this segment relative to the Famous Footwear segment.
It should not come as a surprise that other profitability metrics also improved year over year. Operating cash flow, for instance, jumped from $19 million to $32 million. If we adjust for changes in working capital, we get a more modest increase from $57.4 million to $64.9 million. Meanwhile, EBITDA for the company expanded from $72.3 million to $81.1 million. For context, in the chart above, you can see results for the first nine months of 2023 relative to the first nine months of 2022. Just as was the case with the third quarter on its own, revenue did drop year over year. What is interesting to note, however, is that with the exception of regular operating cash flow, all profitability metrics for the business worsened. Much of that pain was driven by a more typical mix of clearance products sold, so it does seem as though, as the year was coming to an end, the picture was getting better as opposed to worse.
When it comes to the 2023 fiscal year in its entirety, management did say that overall revenue would be down by between 4.5% and 5.5%. Unfortunately, that also includes a 53rd operating week for 2023. So excluding that, revenue will be down even more. Adjusted earnings per share, meanwhile, should be between $4.10 and $4.20. At the midpoint, that would imply profits of $147.3 million for the year. No guidance was given when it came to the other profitability metrics. But if we annualize them from the first nine months of the year, we would expect adjusted operating cash flow of $221.2 million and EBITDA of $250.1 million.
Using these figures, we can value the company as shown in the chart above. Yes, on a price-to-earnings basis, a price-to-operating cash flow basis, and an EV-to-EBITDA basis, the firm is more expensive using the estimates for 2023 than using the historical figures for 2022. But even that being the case, shares are trading in the mid to high single-digit range. This always gets me excited. The value investor in me loves looking for a bargain. The cool thing is that shares are cheap not only on an absolute basis but also relative to similar firms. In the table below, I compared the company to five similar firms. On both a price-to-earnings basis and a price-to-operating cash flow basis, only one of the five companies was cheaper than Caleres. And when it involves the EV to EBITDA approach, two of the five ended up being cheaper.
|Price / Earnings
|Price / Operating Cash Flow
|EV / EBITDA
|Shoe Carnival (SCVL)
|Boot Barn Holdings (BOOT)
|Designer Brands (DBI)
|Skechers U.S.A. (SKX)
|Steven Madden (SHOO)
It is worth noting that, while the third quarter for the company was rather robust compared to the rest of the year, broader data for the retail shoe market diverges from this. As you can see in the chart below, monthly data, year over year, ended up worsening from the start of the year through most of the end of the year. We don’t have data for the month of December yet. But in both October and November, year over year sales were lower than they were the year prior. I know that the Federal Reserve has been trying to weaken consumer demand. And it is possible that we are seeing the results of those efforts here. After all, it’s not terribly difficult to postpone the purchase of new shoes. Don’t judge me, but I have been doing that for years now to the point where my regular shoes are practically falling apart.
At this point in time, I can understand why investors might be cautious. Shares of Caleres have outperformed the broader market by a pretty nice margin. In addition to this, industry data suggests that there is some weakness afoot (pun intended). But the beauty of our investing is that you don’t have to be right about everything. If you buy a company at a low enough price that carries a large enough margin of safety, even being wrong about some things can still result in attractive upside. In addition to being cheap on an absolute basis, shares of Caleres are trading on the cheap side of things relative to similar firms. The most recent cash flow data has been encouraging and I see no reason why investors should fear a material deterioration there. Given these factors, I believe that a solid ‘buy’ rating is still appropriate at this time.