We’re adding Caleres (CAL) to our Best Idea Long list, as we think the stock has 50%-60% upside to $27-$28 within 6-9 months, and is a $40+ stock in 18-24 months (that’s a double+ from the current $18.88). The call here is quite simple. This is one of the more misunderstood and most poorly covered stocks in retail. There are only two sell-side firms that cover the name (down from 7 analysts pre-pandemic, and 10 analysts 5 years ago when it was a $40 stock). Both covering firms are small, non-bulge bracket – and (with all due respect) both analysts seem to be asleep at the switch as it relates to modeling some key developments that we think will drive significant upside to numbers and get people paid over the next two years. If you’re looking for a well-managed, under-the-radar company where you can take advantage of meaningful positive changes in the model with no one paying attention – look no further.
For those of you who don’t know who or what Caleres is (which is ~98% of Wall Street) it’s the owner of Famous Footwear – a chain of ~900 family footwear stores that sells a mix of athletic and dress shoes for the entire family. The stores are largely located in strip centers (about 70% of the portfolio), with the reminder split between high quality regional malls and outlet centers. The company also owns a portfolio of wholesale brands including Allen Edmonds, Sam Edelman, Naturalizer, and about half a dozen other brands that got crimped during Covid when no one bought dress shoes. From a revenue and cash flow perspective, its roughly 55%/45% Famous Footwear vs Branded Portfolio.
The consensus numbers here are laughable. The ‘Street’ (if you want to call 2 analysts the Street) is assuming that both revenue recovers to pre-pandemic levels in Fiscal 25. I repeat – FY25. We’re modeling that the company has a full revenue recovery by year 2, and hits new peak earnings of $2.40 THIS YEAR, with an upward bias to our numbers (consensus is at $1.62).
Several key modeling considerations…
- Recovery: Both Famous Footwear and more specifically the Brand Portfolio will benefit from consumers changing up their wardrobes to more dressy look starting in 2H – after largely abandoning the category for 18 months.
- Stimulus: The Famous Footwear banner is a major stimulus beneficiary. It did not fully benefit from last year’s stimulus because stores were closed from mid-March through mid-May, and then opened sporadically and with limited hours thereafter. There’s pent-up demand which benefits recovery, but then Stimmy fuels the rebound – particularly over the immediate-term.
- Renegotiating Leases. The company is renegotiating virtually its entire portfolio of 1,100 leases. Anyone catch the WSM results? The company renegotiated the lion’s share of its leases and it drove 200bp of Gross Margin improvement – which is permanent. We’re not banking on the same magnitude of benefits at CAL, but even if we assume a 50bp improvement in gross margins, it gets us to an incremental $0.30 per share on top of the $2.10 earned in FY20 (Jan). Unprofitable stores that can not be renegotiated are being shut down upon lease expiration – there’s about 100 of them, or 9% of the portfolio.
- Cost Cuts. This is the real big nut…The company will have cut $100mm in costs out of the model over the course of the pandemic. That’s $2.15 per share in earnings right there. That doubles the $2.10 per share that the company earned pre-pandemic. Pre-pandemic this company earned a 4.5% EBIT margin, and the Street has EBIT margins getting back to 4.7% in another 5-years despite the fact that the company just freed up 3.5 points in margin due to outright cost cuts.
- De-levering. With the snap back in sales on a lower cost structure comes more cash flow, and the company is using the cash to de-lever. That gives us an incremental $0.15 per share, or 7% earnings accretion over FY20 levels.
All in, we’re assuming a full revenue recovery by the end of year 2 in our model – vs the consensus at year 5. We have margins at a new peak of 6.4% next year (when the cost cuts alone suggest that something over 8% is reasonable). We’ve got a 50% decline in interest expense, and it all nets out to $3.70 in EPS – more than 2x the $1.79 consensus. This name trades at 10-14x earnings almost religiously – so let’s use a 12 multiple. That’s a 44 stock in 12-18 months. For this year, we’re nearly 50% ahead of the consensus at $2.40 (Street at $1.62) – using that same 12x pe gets us to $29, or 52% upside from where the stock is today – which should be realized as we see early upward revisions in the year over the next two quarterly earnings releases.
