CAL | Bullet Proof Print and Guide

Best Idea Long CAL put up what we think is a bullet proof quarter. The company printed $1.19 per share – more than doubling the consensus of $0.54 and a nickel ahead of our estimate. Importantly, the company guided up 3Q by a factor of 2x, and guided to the full year of $3.25-$3.50 vs the Street at $2.24. We think that the company earns closer to $4.00 for the year. That’s been our call all along. The company is seeing a solid recovery in its Famous Footwear business – particularly in its athletic assortment – and put up a top line 8.1% better than 2019. Its portfolio of dress footwear brands was down vs ‘19, as expected, but is improving sequentially. E-comm was up 58%, which is an exceptionally strong result given that traffic is returning to the stores, and most importantly, margins on e-comm (which had previously been dilutive) were up 1,200bp vs 2019. The company shored up its balance sheet by paying down another $100mm in debt, bringing the debt reduction tally to $325mm over five quarters. It should be debt free and buying back stock within a year. The company wasn’t immune to the supply chain issues plaguing the rest of retail, but managed to get the right product in the right place to still drive the top line where it mattered. Any excess freight costs are embedded in the above-consensus guide for the balance of the year. We ‘get it’ that people are putting trough multiples on retail thinking that we’re in the back half of a peak earnings year, but CAL is going to not only beat its own guidance this year, but will likely grow earnings again next year as the brand portfolio fully recovers. As a sanity check, this company put up $110mm in EBIT pre-covid. Then it cut $100mm in costs out of its system. Our $4.55 EPS estimate for 2022 assumes only $215mm in EBIT. Yes, it’s a peak margin level, but this company just streamlined its way into a permanent 300bp margin lift vs pre-pandemic. This name historically trades at 12-14x earnings…but even if we give it a meaningful discount because people don’t want to pay up for small cap retail, we still think that 10x should be a floor for a name like CAL. If we’re right, then there’s a $45 stock in 12 months vs $26 in after hours trading. We’re sticking with this one…