Good afternoon. My name is Ian and I will be your conference operator today. At this time, I'd like to welcome, everyone, to the Third Quarter 2017 Caleres Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to turn the call over to Ms. Peggy Reilly Tharp. Ma'am, you may begin.

Good afternoon. I'm Peggy Reilly Tharp, Vice President of Investor Relations for Caleres and I'd like to thank you for joining our third quarter 2017 earnings call and webcast. A press release with detailed financial tables and slides are both available at caleres.com. Please be aware, today's discussion contains forward-looking statements, which are subject to a number of risks and uncertainties. Actual results may differ materially due to various risk factors including, but not limited to, the factors disclosed in the company's Form 10-K and other filings with the U.S. Securities and Exchange Commission. Please refer to today's press release and our SEC filings for more information on risk factors and other factors, which could impact forward-looking statements. Copies of these reports are available online. The company undertakes no obligation to update any information discussed in this call at any time. Joining the call today are Diane Sullivan, CEO, President and Chairman; Ken Hannah, Chief Financial Officer; and Rick Ausick, President, Famous Footwear. And I would now like to turn the call over to Diane Sullivan.

Thanks Peggy and good morning and thanks for joining us as we report results for what turned out to be a very fluid quarter. After a strong start in August with weekly positive comp sales at Famous Footwear, September, including back-to-school and Labor Day, was interrupted by hurricanes in Texas and Florida. These events were then followed by an unseasonably warm start to October. Even though the quarter became progressively more challenging, we delivered improvement in gross margin and generated strong cash flow while paying down our revolver borrowings. However, the weather-related events had a negative impact to topline sales of approximately $35 million and resulted in third quarter earnings per share of $0.80. But as more seasonal weather has arrived in November, business has improved and sales are performing accordingly. As a result, we are confirming our full year adjusted EPS guidance of $2.10 to $2.20. With the fourth quarter still ahead of us, we are confident our strategy is working and that our teams are focused on the right short-term efforts and longer term initiatives. Now for a few specifics on Famous Footwear where comp sales were up 2.6% for the back-to-school selling season and up 0.9% in the third quarter. As in the second quarter, comp sales were up both in-store and online. We also saw an improvement in conversion rates in-store and online. And for the first nine months of the year, e-commerce sales represented nearly 10% of total sales. In the third quarter, we anniversaried another double-digit quarter of growth in lifestyle athletic sales with key brands driving the improvement. The brands that made up a significant share of our back-to-school sales last year were once again big contributors this year. In particular, women's and girl's athletic sales maintained their lead and were up high…

Thank you, Diane and good afternoon everyone. For the third quarter, we delivered earnings per share of $0.80 versus net earnings per share of $0.81 in the third quarter of 2016, reflecting the impact related to the hurricanes in Texas and Florida and the unseasonably warm weather. Our consolidated net sales for the third quarter of this year were $774.7 million, up 5.8% over last year, despite a topline weather-related impact of approximately $35 million. For our Brand Portfolio, third quarter sales of $301.5 million were up 14% versus the prior year and included $44.1 million of sales from Allen Edmonds. At Famous Footwear, third quarter sales of $473.1 million were up 1.1% over 2016 as we operated eight more stores year-over-year through the back-to-school timeframe. As Diane mentioned, our comp store sales at Famous Footwear were up 0.9% for the quarter. Let's turn to consolidated gross profit, which came in at $316.9 million for the third quarter. Gross margin of 40.9% improved 79 basis points year-over-year. In the third quarter, Brand Portfolio continue to drive strong contributions to our consolidated gross margin, delivering 192 basis points of improvement. Our organic gross margin was up more than 30 basis points, including the mix impact from lower boot sales. For Famous Footwear, third quarter gross margin of 41.9% was up 26 basis points, reflecting primarily the success of our e-commerce initiatives. Our buy online pickup in-store program has been available at all doors since mid-June and represented approximately 13% of Famous.com orders in the third quarter. Our total SG&A in the third quarter was 34.1% of revenue or $264 million, including nearly $20 million of expense from Allen Edmonds. Excluding Allen Edmonds, our Brand Portfolio SG&A expense was up 9.6% year-over-year, primarily reflecting increased investment in our fulfillment program and distribution…

[Operator Instructions] Our first question is from the line of Scott Krasik from Buckingham Research Group. Scott, your line is open.

Hi, sorry about that. Had the mute on. Hey guys, how are you?

Hello Scott, how are you?

Good. Thanks. So, just first on Famous, can you just parse exactly what that comp impact if you break down the $35 million, what the hurricane impact was to Famous?

Yes, it's probably easiest for me to, kind of, cover it in total, Scott, and then break it down. So, in total for Caleres, we'd say the hurricane impact was roughly $5 million and a little more than half of that would be attributed to Famous.

Okay. Okay, that's helpful. And then you alluded to the athletic -- fashion athletic category being the biggest driver. We've also now heard about some changes in the fashion, bottoms fashion in particular, from various retailers. When do you think that starts to affect your results of Famous and would you view that as incremental or cannibalistic to fashion athletic?

Well, I'll take a stab at that and Rick can fill in. I think we look at our business in the third quarter, and again, we've been on this fashion athletic piece for quite a while now. And when we look at our athletic business that includes that in the third quarter. In women's, we were up high single-digits and in athletics, men's up low-single and kids up high single-digits. So, we really think we're still powering through extraordinarily well based on the great decisions that the merchant team is making in the assortment of that product. So, we don't see that slowing down at any time soon. I think those space that we see a little more the slowdown would be on the Kansas side. But they're -- the fashion athletic, we feel has gone a little bit more runway in it. I don't know, Rick, how would you characterize it?

Yes, I think Diane said it pretty well. I think there's always things we're looking at on the casual side of the footwear business that is nonathletic to see if there's opportunities there. And there's been a few things that look promising, but nothing that I would say are taking over from that athleisure sports-style trend that we've been seeing for the last 12, 18 months.

Okay. And then, Rick, you tend to sort of not participate in the extreme boot promotion that go on around Black Friday and some of these things leading up to Christmas. So, maybe -- is there a change in strategy there? I'm just wondering based on the comment you made on -- or was that more on the branded side of the Caleres business?

Well, it's really more on the branded side. I mean, at Famous, we have our marketing and promotional plans set for the fourth quarter. They are pretty consistent with our philosophy and the way that we've run our business on -- for a number of years. If the marketplace changes significantly, maybe we have to respond to it. But fundamentally, Scott, it's really more about our Brand Portfolio and the impact that we might see from other retailers on our business. Rick?

Yes, I think, Scott, we've pretty much been very consistent. I mean, read the selling. We have plans on how many we want, how much we want to sell on a weekly basis. If we see declining rates of sale, we look at price actions. If we don't, we let the prices roll until the customer tells us whether or not that price will sell. So, it's been successful for us. The merchants work hard at it every week, every day, almost on -- at these kind of times. So, I don't think there's anything yet that tells us that it's going to be extremely promotional. I'm sure there are people out there that are still -- in fact, I know people who have already run buy one get one free boots in some places in October, when they thought the business was soft. But we haven't done that and we won't do that this holiday either.

Good. Okay. And then just, Ken, if you said it, I missed it. Did you say what your Brand Portfolio gross margin was ex-Allen Edmonds?

Yes, it was up 30 basis points.

Okay, perfect. All right, thanks everyone. Good luck. Happy Thanksgiving.

Thanks Scott.

Thanks Scott.

And our next question is from the line of Laurent Vasilescu from Macquarie.

Thank you. Good afternoon guys.

Hi Laurent.

Hey there. I wanted to ask about -- to Scott's question, about the $35 million. Based on the comment, does that mean there was a $30 million impact to the warm weather in October? Is that the way we should understand that comment?

Well, I would say in the third quarter, there was an impact. Really the rest of that is really the way we would think about our boot business. Against again -- make sure we're clear. It's against last year, right? So, against last year, we'd say at Famous Footwear, we would be down about $10 million in terms of boots and on the Brand Portfolio, about $20 million. We planned to be down at Famous, as I had mentioned, around $5 million in total for boots and down about $12 million on women's, and on the Brand Portfolio, down about $12 million on women's. So, you shake it, that all up, Laurent and you kind of look at what we think the total net impact would be, it would be somewhere in the -- about the $15 million range for boots against our plan and still the $5 million that would be there because of the hurricane impact in our sales.

Okay, that's very helpful. And then I'm just doing the math right now. But I think you mentioned that boots were down 20%. Can you remind us how big the boots business is for the third quarter and possibly for the fourth quarter in [SG&A] [ph]?

At Famous, it's less than 10% of the fourth quarter -- 10% of the third quarter business. It's about 20% to 25% of the fourth quarter business.

Okay. And then shifting gears to Naturalizer. I think you mentioned there were some -- still some progress in that business.

Yes.

Any -- can you provide a little bit more color or context, not specifics on spring business for next year, but should we think about business continuing to be up for the foreseeable future?

Yes, we feel really terrific about it. I mean, it was up the low to mid-single-digits in the quarter and you look at how the market performed. According to NPD data, they were saying that the market was down about 2.2%. So, we were -- and on that brand, outperforming the market quite nicely. So, we think it has quite a bit of runway and really fully expect it continue to make lots of progress.

Okay, helpful. And then last question. I think last quarter you mentioned traffic was up 3.5%, some context around bricks-and-mortar versus Famous.com. Any updates on those metrics for the third quarter?

We are looking. Hold on.

Yes, traffic was down both at brick-and-mortar and Famous.com, I think, in the third quarter.

Okay. Any context to that?

Well, on the dotcom, which is I think the biggest change that you'll see, part of our strategy was for most of the year has been trying to understand how we can gain some margin back in that business because it's very expensive for us to run and fulfill. So, we managed through our promotional calendar a little differently in the third quarter. And that's a place where, when the customer -- we go promotional, the customers find it and shop it really hard. So, we lost quite a bit of traffic on a couple of handful of days in the third quarter that were -- have been highly promotional that we didn't repeat this year.

Yes, conversion there was up double-digit and the AURs were up. So, I think we tried to call out in the script a little bit about the margin improvement at Famous. So despite what we talked about in boots, Rick and team were up 26 basis points in the quarter. And so I haven't seen many retailers that are communicating increases in their gross margin year-over-year. So, -- and that was a strategic shift that the team made as one of their e-com initiatives and we certainly saw it pay off in additional profitability.

Okay. Thank you. And best of luck.

Thanks.

Thanks Laurent.

And our next question is from the line of Steve Marotta from CL King & Associates.

Good evening everybody

Hey Steve.

Hey Steve.

Reiterate -- I believe you said that the monthly comp sequentially through the third quarter was weaker, so August, September and October. Can you give a little bit -- I know you don't give monthly comps, but mid-single-digit, low single-digit. Can you give a little bit of guidance just on what they were?

Sure. Yes, sure, no problem, up low single-digits and down slightly September and October.

Okay. And what is November running to-date?

It's running in the mid-single-digits, up.

And why did the expectations changed for the year from a gross margin and an SG&A standpoint? I believe you mentioned some improvement in gross margin, a little bit better than expected and then more retail facilities opened at deeper end of the year? Is most of that accurate or did I get that wrong?

Yes, we had originally had our guidance up around 45 to 55 basis points for margin, and we've been running ahead of that. And so we went ahead and updated that and left our self 10 basis points of room for the promotional nature that could occur. And then we made a conscious decision in the real estate for Famous to go ahead and as we were renegotiating leases and communicating closings, we were able to go month-to-month on a number of leases. And so we held those stores open through the back-to-school timeframe. So, you've been -- in addition to Rick and team being up 0.9% on a comp store basis, they were up 1.1%, 1.2% in total. And that's where we got the benefit of holding those stores through back-to-school. So, there was additional SG&A expense that was incurred. So, we went ahead and updated the SG&A guidance as well.

Great. Last question is on lease renewals year-to-date. Can you talk about if there's been any either, A, material rent relief? Or B, shortened lease lives in the renewals that have been signed

Yes, we haven't really seen shortened lease lives. I think, typically, our leases are five years. And so as we're going through and renewing, the only thing that would be shortened is where we've given notice that we were going to close a store and we were paying rents that were 17%, 18%, 19% of revenue. And the landlord came back and said, well, would you go month-to-month and we'll do 8% of gross sales or something like that. So, the only shortening would be where we went from not renewing to our typical five-year term and going to month-to-month. And yes, we have seen a number of landlords that have come back and given us some reductions in order to renew.

Terrific. Thank you. That's helpful.

[Operator Instructions] Our next question is from the line of Chris Svezia from Wedbush.

Good afternoon everyone. Thanks for taking my questions. I've got a bunch of them. I guess, first, when you look at the $35 million weather-related, you would have had 10.5% sales growth in the quarter. I'm just curious, can you give any color, Ken, about what that is from an earning's perspective, what you lost because of this in the quarter?

Well, I think Diane alluded to earlier, when we talk about this, what we try to do is quantify the impact year-over-year. And what we've added to that conversation is a little bit of what we had planned. So, when we look at year-over-year and we look at $0.81 last year and $0.80 this year, when we talk about that boot reduction, I mean, that's a pure reduction in boots sales year-over-year. When we go talk about what our expectations were in the category, then that's what Diane was alluding to around, we had plans that in most of the women's categories were down, I think, 12%. I think Rick, all-in, was planned down 5%. So, when you look at that -- and we didn't go into the period believing that we were going to capture that full $35 million in our Q3 results. So, I think that's -- there is a little bit of a nuance there as to that $35 million is what we believe the year-over-year impact is associated with, the weather and the two hurricanes and then also, the unseasonably warm weather's impact on boots.

Okay. Your comment about being up mid-single-digit comp in November. Can you just remind us what it was, November, December, January last year for Famous?

We can. And we're looking it up, Chris.

Last year?

Yes.

November was down. December was up low to mid singles, low singles, and then January was down again low singles. So, down, up, down.

Okay, got it. And when you look at -- what's going on, on the Branded Portfolio side of the business as you transitioned into November, just given the whole premise of rapid replenishment, reacting. Have you seen a similar directional improvement in the business?

Yes, we have. Pretty much with all of our customers, we've seen an improvement in business, not necessarily to the mid-single-digit increases, but certainly, low to mid. And I think it's probably worthwhile, Chris, for me to just give a little perspective about the market and what happened in the market in the third quarter. If you look at total Footwear, according to NPD in Q3, again, I think I mentioned it was down about 2.2%. Boots and booties in that same Q3 time period were down 18.5%, which is obviously a significant decline. Caleres, when I look at our share of market, because we've been looking at this trying to really make sure we understood very clearly what had happened in the third quarter so we could make the appropriate plans and project throughout the rest of the year, we really spot -- our share in the quarter actually begins flat in total and our boot business is very consistent with how the market responded. So, we really think, again, during this time period, we actually outperformed the market by a couple of percentage points. And it's quite a bit of the reason why we feel as we're moving into the fourth quarter, along with the trend since the weather changing to much more seasonable weather, we think it's going to continue.

And Diane, when you talk about low to mid-single are you talking about your organic business excluding Allen Edmonds?

Yes, yes.

Okay. All right. That's good to know. And for Famous, the majority of that mid-single-digit improvement in November is being driven by the boot business or are you also seeing lifts in other categories?

Well, I think we're seeing lifts in everything. But for sure, a significant swing in terms of our boot business.

Okay. And the only risk that you see. So, when you articulated, you felt a little bit more comfortable at the low end of the earnings range, that's assuming the environment gets more promotional to move boots throughout the season. Is that -- did I catch that correctly?

Yes, yes, you did.

Okay. And Famous Footwear in Q4 last year had pretty much flat EBIT margins. They were down 300 basis points. How should we think about that going to this fourth quarter? I assume you're still closing these stores. So that's going to certainly be a plus and I think there was some marketing that you did in the fourth quarter last year that you're either pumping on this year or you're doing something different. But just talk about a little bit how we should think about Famous and EBIT margin for Q4.

Yes, so we're anticipating significant improvement year-over-year at Famous. Just the current run rate both with what they're seeing on the topline, what they're seeing at their gross margins improving year-over-year, we think that continues into the fourth quarter. And then with the closing of an additional 20 stores, you get a pretty significant reduction in their run rate on SG&A. So, we're expecting the performance in Famous to continue third quarter right into fourth quarter.

And that will be mitigated to a degree, as well, Chris. There'll be -- some of the things we did last year weren't as successful as we would like so we analyzed that and decided to either reposition the money or not spend it.

Okay, understood. Got it. And then just finally, just on Allen Edmonds. Just remind us again the accretion in the fourth quarter last year. I know you had $20 some odd million in revenue, I believe. That probably helped a little bit on the margin. Just remind us again what it did to the Branded Portfolio business last year for revenues and margin and maybe where that business is right now. I would assume, apples-to-apples, the EBIT margin for that business is probably better given some of the things you've done in terms of the integration process. Just if we talk about where that is and how we should think about it year-over-year.

Yes. So we got I think somewhere around $24 million, $25 million of topline in this stub period. So, we would -- and that was roughly half of the quarter. We closed the middle of December. So we would expect that we would be getting every bit of twice that amount in the fourth quarter. The margin that came through in the period, I mean, we basically were going through -- and we had taken on the $255 million revolver borrowing and so we had some interest expense. So, it didn't really contribute to the bottom line in the fourth quarter last year nor has it been all that accretive through the first nine months. And so that's, as we've kind of said all along, it's been running about $20 million of expense a quarter. And so we saw a little bit of a tick-up in sales in the third quarter over where we'd been the first and second quarter. And we would expect that to tick up again in the fourth quarter and a good portion of that drops through and certainly will be accretive in the fourth quarter and will be accretive for the year. So we're very pleased with the progress that, that team is making. And as Diane mentioned, excited to kind of share some of those initiatives with all of you as we kind of go through -- close out this year and get into year two.

Okay. All right. Well, thanks very much and Happy Thanksgiving to all.

Thanks Chris.

Thank you.

And our next question is from the line of Sam Poser from Susquehanna.

Good afternoon and thanks for taking my question.

Hi Sam.

Hi Diane. Let's -- what was the -- first of all, what was the sales -- what was the inventory levels, excuse me, at Famous? I don't know if you mentioned that or not, I may have missed it.

Yes, I think it was up 1.3% on a--

1.3%. And I think on a dollar basis, and about up 0.6% on a sales basis.

[Indiscernible]

All right. So, let me follow up on total then. When you look at the total inventory and sort of your implied guidance and so on, your forward -- what is sort of a target turn for the company here? And what kind of forward weeks of supply of inventory should you have in the -- both at Famous and then in total?

Yes, so I think -- I mean, we've been turning Famous at 2.3, 2.4, 2.5 turns. I think right now, with where we sit and a little bit of timing in terms of end of third quarter, beginning of fourth quarter, we're very comfortable with our inventory position at Famous. On the Branded side, we're -- if you back out the Allen Edmonds business and you just look at our organic business, I think we were up roughly 10%. And so that 10% is something like $15 million or $16 million. I think $6 million or $7 million of that was boot inventory. So, the non-boot is inventory that's associated with the growth that's happening at Sam Edelman and at Naturalizer and at Vince. And then the $6 million, I think the boot inventory is really just timing of carryover from Q3 that we would anticipate to be sold into Q4.

All right. And then on a per -- inventory per store, up, down. What's it down from last year? And if you can give us what the store opening and closings were in the quarter, because I don't think that was in the press release.

Yes. So, Famous on a per store basis, on a unit was, I think, up 0.6% in--

0.3.

0.3%, yes.

And on a dollar basis?

1.6%.

Okay. And then how many stores did you open and close in the quarter?

We --.

We opened 12 and we closed 25. But keep in mind that we kept a number open through back-to-school, so that's -- we're not--

Most of the closings came between end of September and the 1st of November.

Okay. And then you're planning on closing additional 20 in the fourth quarter?

That's correct.

Correct.

Okay. And when you look at the overall atmosphere here and what you're doing to drive people in and your -- you didn't change your guidance for the full year. I mean how much of this pressure do you think is going to happen? Given your inventory levels to me look slightly higher than they should be, is that sort of why you'll -- why, if it gets promotional, you may have to promote just to keep clean? Or--

Well, that would be the only reason we'd promote anytime. I got to think, we feel pretty comfortable around the boot business right now. And again this week, or the last 10 days or so have proven that it looks like we might be okay there. But we have a lot of business ahead of us. So that's the -- the big weekend is coming out, the Cyber Monday and Tuesday or whatever's going to happen next week on a weekly basis. Last year, we did get a -- we've got some weather right before Christmas. So, we did have a jump in our boot business right before Christmas last year. It'll depend whether -- how that all transitions this year, Sam. But we look at it all the time and that we haven't -- right now, our margins in boots are actually pretty good. So, -- but we're looking at it. So, we'll go through this weekend. We'll look on Monday and we make price next week to move more goods.

Yes. And Sam, as it relates to the inventory of the brand portfolio, as Ken has mentioned, it's really in Sam and Naturalizer and Vince, and all of those brands right now are again -- got terrific trends and the boot penetration there is actually fairly light. And in fact, I'd say in two of them we're actually running out of some tall-shaft boots that we were surprised, actually surprised about. So, it's the remaining other 6 million of boot inventory and other brands that we'd obviously have to watch out for. And I think we've -- really kind of for that in our thoughtful guidance for the remainder of the year.

Right. And then I know you don't want to guide to -- you don't want to talk about 2018 but can we talk about it just as it relates to the 53rd week? And since you guys do a huge back-to-school business and that first week -- or that first week of August is going to become the last week of -- which was the first week of Q3, this year it's going to become the last week of Q2. Could you give us some idea of how many -- like, from a dollar perspective, what the sales shifts are that will like -- forget about what the comp is, just like what was that week -- what are those shift weeks that we can model correctly because there's going to be a huge variance between comp and sales results when you report Q2 -- especially Q2 and Q3 because of that huge week that moves. Can you give us some color there?

Yes, what we had done is we had provided the color on 2017 in terms of the incremental expense associated with the 53rd week. And as we give our guidance for 2018 and get into those quarters, where we see a material shift from one quarter to another as we go from a 53-week year to a 52, we're going to provide that color.

It's not really the 53 to 52. I get the extra dollars related to the 53rd week. Really, what it is, is that -- so if everything shifts out a week next year, the first that -- one of the biggest weeks of back-to-school is going to move from Q3 into Q2, and that's going to move a lot of dollars and that's something that has nothing to do with guidance. That's just has to do with how much are those dollars. Whatever the comp is -- whatever comp you're expecting is a separate conversation. So can you give us some idea?

Yes, I'll say, right now, we're focused on delivering the fourth quarter and the year. I don't know about you, Rick, but I haven't looked at week 13 [Indiscernible]

[Indiscernible] bought the shoes yet for back-to-school. So, we know what you're asking, Sam. That will come later.

Yes, we will share that information as we get out into 2018, where there's material differences shifting between one quarter to another.

All right. Well, I tried. Thanks very much. Have a very Happy Thanksgiving everybody.

Thank you, Sam.

Thank you. You too Sam.

And I'm showing that we have no further questions. I turn the call back now to Diane Sullivan.

Thank you very much for joining us for our third quarter conference call and we wish everybody a very Happy Thanksgiving and we look forward to seeing you along the way this next quarter. Take care.

Ladies and gentlemen, this does conclude the third quarter 2017 Caleres earnings call. You may now disconnect.