Brick-and-mortar Weakness Will Persist As Digital Transitions Will Offer Hope

Key Takeaways

• Slow adaptation to digital and e-commerce trends, along with reliance on legacy brands, threatens market share, margins, and long-term profitability.
  
• Ongoing supply chain pressures, consumer spending weakness, and rising sustainability demands increase the risk of earnings erosion and reputational damage.
  
• Strategic emphasis on DTC growth, successful owned brands, premium acquisitions, kids' market leadership, and permanent cost reductions positions Caleres for improved profitability and long-term revenue expansion.

Catalysts

Engages in the designs, develops, sources, manufactures, and distributes footwear in the United States, Canada, East Asia, and internationally.

• Ongoing consumer migration to digital and direct-to-consumer channels threatens Caleres' significant exposure to traditional brick-and-mortar sales, risking structural declines in top-line revenue and potential store productivity erosion over the long-term.
  
• Persistent inflation, stagnant wage growth, and weaker consumer spending on discretionary items are expected to pressure demand for non-essential products like footwear, leading to prolonged softness in revenue and net earnings for Caleres' broad brand portfolio.
  
• Heavy reliance on legacy and lower-growth brands, together with slow e-commerce transformation relative to competitors, could result in further market share losses and margin compression, hindering both earnings and long-term profitability.
  
• Rising supply chain costs, ongoing sourcing disruptions due to global trade volatility, and escalating requirements for inventory reserves or markdowns heighten the risk of gross margin pressure and weaken cash flow generation in future quarters.
  
• Increasing consumer demand for sustainability and ethical production requires substantial investment in materials and supply chain upgrades, and any failure to keep pace could cause reputational harm and loss of competitive positioning, placing additional downward pressure on future revenue and earnings.

Caleres Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Caleres compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Caleres's revenue will decrease by 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.0% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $90.9 million (and earnings per share of $2.78) by about June 2028, up from $80.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Caleres Future Earnings Per Share Growth

Risks

• Caleres is experiencing positive long-term momentum in its direct-to-consumer channels, with DTC sales seeing modest increases and e-commerce sales up 2.5 percent in Famous Footwear, which suggests that digital and omni-channel expansion could drive higher recurring revenue and improve margins in the future.
  
• Lead brands such as Sam Edelman, Allen Edmonds, Naturalizer, and Vionic, which together account for a significant proportion of sales and an even higher share of operating earnings, continue to outperform the rest of the portfolio, indicating that a strategic focus on higher-margin, owned and licensed brands could lift overall gross and net profit margins over time.
  
• The planned acquisition of Stuart Weitzman, with its strong premium positioning, robust direct-to-consumer presence, and international footprint, positions Caleres to benefit from more resilient higher-end consumers and to capture growth in the accessible luxury segment, both of which could have a positive impact on revenue and long-term earnings.
  
• Caleres' competitive advantage in the kids' segment and leadership with millennial families, further boosted by exclusive launches like Jordan and ongoing market share gains, signals potential for Famous Footwear to sustain or grow sales, particularly in strategic categories, supporting both revenue growth and cash generation over the long term.
  
• The company is executing permanent, structural cost reductions with an expected $15 million annualized savings in SG&A expenses, and is focused on ongoing supply chain optimization, which should enhance operational efficiency and improve profitability, even amid short-term volatility.

Valuation

• The assumed bearish price target for Caleres is $14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Caleres's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $90.9 million, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $13.34, the bearish analyst price target of $14.0 is 4.7% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.