Good afternoon. My name is Sarah and I will be your conference operator today. At this time, I'd like to welcome everyone to the Fourth 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]. It is now my pleasure to introduce today’s speaker, Ms. Peggy Reilly Tharp. Ms. Reilly Tharp, the floor is yours.

Thank you. Good afternoon. I'm Peggy Reilly Tharp, Vice President of Investor Relations for Caleres, and I'd like to thank you for joining our fourth 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 US 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 afternoon, everyone, and thanks so much for joining us today to talk about what was just an outstanding year by any measure. In addition to an excellent year, we also had a fantastic quarter. And thanks to our team's perseverance and agility, we delivered these great results in the midst of what is a very well-documented changing consumer landscape. Just to give you a few of our 2017 highlights. Sales were up 8% for the year and up nearly 10% in the quarter. Adjusted gross margin improved 85 basis points over last year and was up 54 basis points in the quarter. SG&A expense was well-managed overall in 2017, and we leveraged our spend particularly well in the fourth quarter. Adjusted earnings per share for 2017 were up 8%, to $2.16, coming in at the middle of the range we guided to last March and maintained throughout the year. Famous Footwear comp sales were up 1.4% for the year and were up 2.8% for the quarter. Our brand portfolio shipped more than 46 million pairs of shoes in 2017 and they had a record-setting shipping month in January. Sam Edelman sales crossed the $200 million mark this year, and our Allen Edmonds acquisition that we acquired last - late last year remains very much on track. And with respect to our balance sheet, we reduced our inventory position by 2.8% and maintained our flexible balance sheet and our cash-flow strengths, as we completely paid down the $110 million in borrowings for Allen Edmonds and also made great progress in our 2017 focus areas. Last year, we focused on areas that we believe were critical to the long-term health of the company and will drive both near and longer term outcomes, as well as making sure they…

Thank you, Diane, and good afternoon, everyone. I'd like to begin by echoing Diane's remarks about our strong performance in 2017. Once again, we maintained our earnings-per-share guidance throughout the year and delivered against our original expectations put forth last March. For the fourth quarter, earnings per diluted share came in at $0.47 on a reported basis and $0.48 on an adjusted basis, up 45.5% year over year. While there was only a $0.01 difference in the reported and adjusted numbers, I'd like to walk you through the components. First of all, we completed some restructuring in the fourth quarter of 2017, primarily in Famous Footwear field operations, where we reduced the number of regions down to four from eight and eliminated 11 districts to align with shifting consumer shopping trends. This proactive effort resulted in a pre-tax charge of $942,000, or approximately $0.02 after tax. Secondly, due to the Tax Cuts and Jobs Act, we revalued our deferred-tax assets and liabilities and accounted for the tax on unrepatriated cash, earnings, and profit. When combined, these items resulted in a $0.01 benefit to our fourth quarter diluted earnings per share. Finally, as a reminder, while the 53rd week delivered additional sales of $23.4 million in 2017, it did not drive any benefit to earnings per share. This is due to the additional wholesale and corporate expenses without related sales. For the full year, reported earnings per diluted share came in at $2.02. Including the aforementioned fourth quarter items and the $0.13 of previously recorded charges related to the acquisition, integration and reorganization of the company's men's brands, adjusted earnings per share was $2.16 and up 8% over 2016. Consolidated sales for the fourth quarter of $702.5 million were up 9.8%. For the full year, consolidated sales of $2,785.6 million were…

[Operator instructions] Your first question comes from the line of Steve Marotta with C.L. King & Associates.

Good evening, everybody. Congratulations on a great quarter and a great year. A couple of quick questions. A lot of consumer companies that we're seeing reporting earnings and offering initial guidance for the coming year are plowing back some of the benefits associated with the new tax plan into SG&A and demand-creation activities. Given the leverage that you're showing on the SG&A line, it looks like that you're not doing that. Could you talk a little bit about the calculus that went into your decision-making on basically uses of funds associated with the tax benefit in the current year?

Yes. Sure, Steve. This is Ken. I think in the past, in order to deliver the earnings that we've delivered, we've continued to invest in our business. And we do not expect 2018 to be any different. I think when we looked at it on an incremental basis, the incremental expense that was coming through our SG&A was really tied to acquisitions and customer acquisition, and that looks like it's an incremental $4 million to $5 million.

Okay. From a CapEx and a D&A estimate standpoint for '18, could you just go over that?

Yes. The expectation is that the CapEx will be approximately $50 million.

And D&A?

The D&A should be pretty consistent with '17.

Okay, that's fair enough. And is there any cadence from an EPS standpoint in first half versus second half? Are there any SG&A costs in particular that you would expect to be sloshed from quarter to quarter?

That's a good question. I think for the most part, unlike last year when we had the addition of Allen Edmonds coming in and we spent a lot of time talking about how that was going to be calendarized, our 2018 earnings are much more consistent with the guidance that we provided quarter to quarter. The only expense to be noted is, Diane mentioned, we are in-sourcing our wholesale distribution warehouse, and there is some expense in the first couple of quarters of the year associated with that, a couple of million dollars.

Okay. And lastly, can you talk a little bit about product and how you see the - specifically from a category standpoint, obviously sneakers as well as fashion sneakers continue to do well. And as you look out through spring and then fall as in the Famous Footwear as well as branded portfolio, maybe just talk a little bit about product. And that would wrap it up for me. Thank you.

Okay, Steve. It's Diane. A couple of things on product. We're seeing actually early reads on spring, looks pretty - quite good I would say. I'll talk about the brand side first, and then Rick and I can share the duty on the Famous side. But as you would expect, we're seeing anything that's sport-related continues to be very strong, not only in sneakers but also in trainers. And actually even sport sandals right now look to be very strong. Any foot-bed kind of product is great. Jute wraps are good. Hybrid concepts are great out there where they're lightweight. So there's - when you turn to fall and you think about boots, boots are - people are kind of planning them to be relatively flat to where they were last year. No one's really finished on the way they're really thinking about what direction they're taking. But I would say that there are a number of actually pretty interesting key items across the landscape that seem to be driving a lot of volume right now. And it seems to be interesting the consumer. And as we look at our retail selling right now, seems quite good on a lot of the areas that we had hoped for. And I think the same thing is true at Famous too. I mean, across the board with respect to athletic and sport and sneaker, I mean has been - continues to be great. Just different brands are coming up in terms of importance I think in that, Rick, right?

Yes. I think again, pretty consistent with what Diane said. Finding - as we refresh, we've been at this for a while. So I think our strategy has been to refresh with color, refresh with material, make sure the brands that we have represented, we have appropriate inventory positions where again, not everybody is a winner, some things are getting lesser and some things are getting more, so making sure our inventory is in a position to take advantage of that. I feel pretty good about how we are positioned at this moment in time in the quarter. Probably need a little less cold and snow weather in the Northeast to really see how much we can do. But outside of that, the other parts of the country are showing pretty good returns on those businesses today, Steve. And we think that'll continue. We think we'll have a - they'll still be strong for first quarter and into second and third.

Very helpful. Thank you.

Your next question comes from the line of Laurent Vasilescu from Macquarie.

Thank you. Good afternoon and congrats on great results. I wanted to ask about Allen Edmonds. I think last year in the fourth quarter, it generated about $24 million. I was curious to know how much the brand generated for this quarter, for the full quarter. And then any indication on how much it contributed to the EBIT line?

Yes. I mean we're not going to get into the specifics around brand by brand. I think as we had talked earlier in the year, it was low 40s in the first quarter and kind of ramped to the - and it ended up in excess of 50 in the fourth quarter and was accretive to our overall earnings per share.

Okay, very helpful. And I think for November - turning to Famous Footwear, I think November comps were running mid-single digits as of November 21. Can you provide clarity on how much the comps performed by month for the fourth quarter?

Sure. We're pretty consistent actually, Laurent. They're all in that mid-single-digit range pretty much across the board. So with December being the biggest, November being second, and January being the slow - the lowest percentage [indiscernible] all within a couple of tenths. They weren't that - there wasn’t that much difference. It was pretty evenly spread.

That's great to hear. And then turning to the full-year guidance on gross margin. The gross margin guided up five to 10 bps. It's a little bit lower than the growth rates in the historical trends. Can you talk about the puts and takes for this guide?

Well, I think that when we looked over the last three or four years, I mean we're up almost 200 basis points. And so as we look into kind of the 2018 time frame, we think we're going to continue to see improvements there. I think we're just a little bit more conservative in terms of our expectations.

Got you. Okay, thank you very much. Best of luck.

Your next question comes from the line of Scott Krasik with Buckingham Research.

Hey everyone, congratulations. Just going back to your comment, Diane, you had a record shipping month in January. I'm wondering, is that a reflection of retailers are sort of lean after Christmas or are they just excited about a couple of your specific brands? How would you characterize that?

I think it's a combination of a couple of things. I think they're very excited by a couple of our brands. I think the work that we've been doing around our speed-to-market projects, again has us really coming back in on items that are strong performance. So we were able to really drive that really nicely. So I think it's a combination of a number of things, Scott. So it was a phenomenal month though, for sure. The teams did a great job.

Your guidance for the branded side of the business is low single digits. You just did 5% in the fourth quarter. What would be the hindrance to growing let's say mid-single digits this year? And do you think you'll grow faster in the first half of the year or the second half of the year?

Well, Excel and Edmonds for the full year were basically flat all in. So we showed a nice pop in the fourth quarter. So I want to see us continue to drive that trend. And so I thought mid-single digits made - or low single digits made a whole lot of sense as we're coming out of the gate, and we'll see how we perform as the quarter and the seasons go. So - but I think it's prudent to chase a little bit because I'm sure you're hearing from most retailers, they really like to chase goods. Those initial orders do not come in upfront. So it's - to get those 5% increases, it's not a simple task. So we want to make sure we're very thoughtful in the way that we guide.

Sure. And then the in-house fulfillment on the branded side, so you were just using a 3PL facility?

Yes.

What happened there?

Yes. Nothing. It was really - we made the decision I would say the middle of last year that we just decided it was - it would be much more prudent long term for us to bring it in-house. And it was - we had already finished and completed the work at Lebanon. It made a whole lot of sense. We looked at our ability to be able to service the customer frankly in the time and at the cost that we - how we saw things projected out in the next couple of years. And we have a terrific team of logistics folks that are here at the company and we felt it was time to do so and it was going to be better for the shareholder if we did that.

Good. And then - sorry.

I’ll just add a little bit of color there. I think as we completed the Tejon and Lebanon and really looked at that entire network, I think what we were wanting to make sure is that we could capture the productivity gains in our wholesale distribution center. And so I think our third-party actually had performed well and it was really just as it becomes more and more a strategic piece of getting goods to the consumer, we felt like we really needed to have complete control over that. So we had selected a site in the fourth quarter and have begun transitioning goods. And there will be some duplicate costs in the first half of the year as we are shipping out of both locations, but this is something that we've done before and have a lot of confidence in and just believe it's the right thing to do as part of moving forward for the consumer.

No, that's great. And then just lastly. Rick, you alluded to you'd like a little more weather to sort of test exactly what's working and what's not. So as you go into Easter here, do you think you've sort of missed some sales? Do you expect some big weeks ahead of you? How do you feel as of now?

Yes. It’s always tricky. You never quite feel like you get everything back. But I think with three of these big storms in 10 days, it obviously has a multiplier effect on the customer in the sense that it wasn't like one event and two days later, everything's back to normal. It was one event, lights are still out. Oh, here comes the next one. Here comes the next one. So I think we had a - I just don't think we know yet. Where we have kind of normalized conditions, our business is pretty good and the stuff we - the items that we believe are the things that are going to drive our business, are performing very well. So we just need to have a little bit more of that and obviously the New York, Philly, Boston market, those are all top 10 markets for us. That's an important part of the country to be out of commission at any time. So again, we're not looking at making excuses for first quarter. I think it'll come. We're just trying to get in the spring break time and all those kind of things. So I think that will help us too because it feels like, at least in my airport visits, more people are leaving those cold places and going to my warm place in Arizona than I've ever seen in my life in the last few years. So I think there's a lot of that happening too.

All right. Well, thanks. Good luck and good luck, Rick.

Your next question comes from the line of Chris Svezia with Wedbush.

Good afternoon and thanks for taking my questions. Congrats. I guess first, I just want to go - on the branded portfolio side of the business, can you just walk through some of the drivers. And more specifically, as you think about 2018 low single digit, maybe walk through what you're seeing between Naturalizer, Edmonds, Sam Edelman, et cetera. Then just sort of give us the lay of the land, what's going on with some of the brands from the growth perspective or lack thereof maybe?

Yes, sure. I mean I think generally speaking, Chris, we feel terrific about where our portfolio is. There's always people that are winning a little bit more than others. But given, if you look at the overall market landscape, we are clearly gaining market share, and you can see it in the data that we look at quarter by quarter and month by month. But let me give you a little bit of a sense of the brands. I mean first of all, our Naturalizer business, you should almost think about sort of our lead portfolio assets on the brand side, Naturalizer, Sam, Allen Edmonds, those three big brands that have retail businesses. They have an Omni-channel business. Those - all three of those businesses again we have done well this year, we believe are going to continue to do well and really show some really nice growth next year. Sam Edelman is now in the top 10 in NPD. Naturalizer moved up five points. They're roughly number 14 on NPD. The stores comped an 8% comp in the fourth quarter of this year. So we're feeling like all the work that we've been doing frankly it's been some time coming, but we feel that that's all starting to come together, and we're actually even going to be looking at the development of - with the new Naturalizer concept that we actually are planning on testing this year. So those three big brands, Naturalizer, Sam, and Allen Edmonds, very good. And LifeStride continues to - that fighter brand that we have out there that got really great price value relationship out there, has been doing extremely well. So those are all great. We also think there's a number of brands that are really powered by the sport category. So whether it's Vince or Bzees or Scholl's or Rykä, all of those again are showing like very, very dynamic trends. So we feel very good about where those are. We have a little bit of headwind still with Walmart that hasn't completely gone away yet. And we're repositioning Via Spiga, but it's such a relatively small business in the scheme of it all, that it's not really material to our overall earnings power for the company. So generally, we really feel that we've got all of our brands positioned in a very good way. And right now the momentum is looking pretty good. But you know it because you've seen it and have lived it too. We have to earn it every single day and our teams work hard to make sure in a zero-sum game actually our market share that in this particular segment is going down. We've really got to work hard to gain even more. So - but overall, we feel quite good about the direction.

Thank you. And the 8% comp, Diane, just - is that just for Naturalizer or is that all the branded portfolio stores?

That was the Naturalizer fourth quarter comp.

Okay. All right. Rapid replenishment, 15% of the inventory or buys or purchases. What is that supposed to be in 2018? And any color about how - when you step back and look at the branded portfolio, I know you're making investments, but how do you think about the margin profile, the EBIT margin profile of that segment based on some of the supply chain initiatives and perhaps replenishment?

Yes. Well again, I think it's - we're all - it's actually just - we're now being - starting to be able to really see the real benefit. It's - we're just being able to try to quantify this in terms of how well we can drive retail sales, how well the margin assistance that gives us because of the sell-through and not the givebacks that you would normally have and the dilution you would have. So we think as we do more and more and more of that, Chris, that not only will the velocity of retail improve, our gross margins are going to improve, and ultimately the EBIT margins along with it. We want to make sure though that we're now getting to the point where we’ve got to be smart now about where we do that. It just isn't going to - it's not going to be - have equal impact no matter where you do it. You’ve got to pick the right brands and the right categories. So now we're kind of in the place where we're trying to really refine our thought process around that and really direct our teams against the things that we think are going to get the best return on investment. So it's really - in '18, it's less about how much. It's really about even learning more about how to quantify the impact of this and get even more of a return on it.

Okay. But I mean, it's fair to say it's increasing from 15%?

Yes, it'll increase. Where it'll land, who knows? I think we want to - we don't want to force the number. I mean I think we're at that point now with our teams. We're trying to do what's the right thing as opposed to force a number. And I know you’re trying to calibrate that, what's right about what that total should look like.

Okay. And Ken, a question for you. Just any impact as it relates to the calendar, the 53rd week and the impacts? How we think about maybe the Famous business? It's probably Q1, Q2, hurts a little Q3, Q4. Just how should we be thinking about that from a modeling perspective? It’s in the sales number or it's in a comp number? Just any color around that.

Yes, there's a little bit in the sales number. And I'll let Rick give some specific color. I think you've got Easter coming into Q1. You've got some shifts into Q2 from Q3. And so you see a little more of an impact in the first half of the year. But I'll let Rick kind of give you the color since he's lived this 53rd-week thing …

One too many times actually. The - if you look at the shifts, the big shifts are between second and third quarter. So second quarter is impacted on a top line around $20 million positive. Third quarter is obviously about $25 million the other direction. And the same thing, fourth quarter is about $20 million, $25 million the other direction. First quarter is about $11 million positive. And those are just a matter of the net effect of what week comes in and what week goes out. So it's nothing more than that, Chris.

Okay. And last thing. Rick, I guess, is this your last conference call?

You never know.

No, not necessarily. Maybe, maybe not.

Let’s see how first quarter is. I'll let you know.

All right. All the best and we’ll talk to you soon. Thanks.

Your next question comes from the line of Sam Poser with Susquehanna.

Well, thank you for taking my question. Just to clarify, can you give us what the Healthy Living and Contemporary Fashion breakdown is by sales for the fourth quarter?

No. I mean I - since we got the Allen Edmonds numbers in there, it's not really as relevant. I think we ended up, up in Healthy Living. And excluding the Allen Edmonds and Contemporary Fashion, I think it was just up slightly. But we don't kind of really even break it out like that anymore.

Okay. And then just that $20 million that moves from Q3 to Q2, I mean that's going to be meaningful, Ken, for the flow of earnings in the quarters because you're going to leverage - you're going to get that incremental sales and then you're going to lose more in the - could you give us sort of what - how you see the EPS impact of that shift?

Yes. I think it impacts Famous and then it's almost equally offsetting in the brand portfolio. And I think, as we look at the two segments, I mean we're at that 50-50 contribution. And so we've got some incremental benefit in Q2 at Famous. And then in the brand portfolio in the first half, we do have some incremental investments that we're making in customer acquisition. And as we mentioned earlier, we've got a couple of million dollars of expense associated with bringing the warehouse in-house. So when you net it all out, it actually ends up being pretty consistent from an earnings standpoint, but for the incremental expense in the first half with the warehouse.

I got you. All right. So basically, you're adding what, $2 million to $5 million in SG&A in Q - in the first half of the year to the brand portfolio and then things sort of flow? And then - but then you're going to have a shift of leverage in Famous Footwear?

That's right. And in the back half, then you'll see the benefits associated with those investments in the brand portfolio segment then offsetting what was a shift forward in the first half at Famous Footwear. So when we looked at it, if you just take kind of a midpoint of the guidance and you kind of look across it, it isn't all that different quarter to quarter, but for a couple of million dollars a quarter of investment in the first half.

Got you. And then with - you had a - Sam is doing very well and Naturalizer appears to be doing very well. Can you talk about how the other brands there are doing? Because it was noticeable to us when we visited out at platform that basically those two brands were sort of - seem to be operating on sort of a little bit of a faster pace relative to even like a Franco Sarto and so on.

Yes. Well, they're - Naturalizer, Sam, and Allen Edmonds, again all terrific growth this last year and all in a great trend. I mentioned that there are a couple of brands also that really, because they're powered in a lot of ways by the sport growth, they've also performed extremely well. So Vince continues to be a great performer. Bzees is growing really nicely. Rykä is growing nicely. Scholl's, because of this, mix we have upside opportunity there. More pressure on a brand like Via Spiga, where they're not known in that sport category and we also are repositioning that business, but it's so immaterial to the total, Sam, it's not a huge impact, which is why I talk about all the others. And the Franco business is looking very good as we go into 2018. We have - it's because it didn't really have any of the sport category. So it was fundamentally mostly just fashion categories, they hadn't really converted as quickly. So as we started to begin to do that, get more product, that is frankly resonating with the consumer. So less seasonal because we were very heavily dependent on boots. We're trying to make sure that we're more sort of shoe-focused I guess, and not seasonal-category focused to try to get that on the right path, which seems to be working right now. So all in, very excited about the total portfolio of brands. And most importantly is the big brands, the ones that really are sizable, have the Omni-channel, have the retail, have wholesale distribution, are really performing in an outstanding manner.

Thank you very much and continued success.

You have a question from the line of Scott Krasik with Buckingham Research.

Thanks. Just a quick follow-up. Rick, the $25 million negative shift in 4Q, that doesn't take into account the almost $20 million for the 53rd week you have to lap as well. Is that correct?

Sure. Yes, it does. Yes.

Okay. All right. Thanks, guys.

At this time, we are out of time for questions. I will turn the call over to Ms. Diane Sullivan for any closing remarks.

Thank you very much for joining us this afternoon. We are excited about the potential for the company and looking forward to speaking with you again in May, if not sooner. Thanks. Take care.

This does conclude today's conference call. You may now disconnect.