Revamping Operations And Embracing Digital Transformation To Fuel Future Earnings Growth

Key Takeaways

• Digital transformation and cloud-based initiatives are set to boost operational efficiency, inventory management, and future revenue growth.
  
• Strategic focus on cost reduction, market expansion, and adapting to consumer trends in fashion sneakers and e-commerce to enhance net margins and revenue streams.
  
• Caleres faces disruptions from ERP system upgrades, sales declines in seasonal products, and operational costs rising, threatening revenue, margins, and long-term growth.

Catalysts

Engages in the retail and wholesale of footwear business in the United States, Canada, East Asia, and internationally.

• The recent upgrade to a new cloud-based SAP enterprise system, despite initial disruptions, is expected to enhance operational efficiency and improve visibility across Caleres' brand portfolio, likely impacting future revenue growth by enabling better inventory management and order fulfillment.
  
• Initiatives to accelerate cost reduction, including a restructuring expected to save approximately $7.5 million annually, are aimed at improving net margins through SG&A efficiencies.
  
• The focus on growing demand for fashion sneakers and the alignment of inventory with consumer demand in trending categories suggest a strategic response to changing consumer preferences, potentially driving revenue growth in the relevant segments.
  
• Caleres' expansion in international markets and new channels of distribution, such as the increased wholesale door count and strategic partnerships, indicates efforts to broaden market reach and enhance revenue streams.
  
• The emphasis on digital transformation and e-commerce, evidenced by the growth in online sales and the operational adjustments made in response to ERP implementation challenges, indicates a forward-looking approach to capitalizing on online retail trends, which could positively impact future earnings.

Assumptions

• Analysts are assuming Caleres's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.6% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $156.1 million (and earnings per share of $4.59) by about September 2027, down from $156.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.1x on those 2027 earnings, up from 7.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.0x.
• Analysts expect the number of shares outstanding to decline by 0.95% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Risks

• The ERP system upgrade and its related execution issues have caused significant disruptions and visibility issues, impacting Caleres' ability to deliver expected sales and manage its operations efficiently, thus affecting revenue and potentially earnings due to lost sales and operational inefficiencies.
  
• Weakness in seasonal product categories, specifically sandals, has led to sales declines, indicating a mismatch between product offerings and consumer demand, which could negatively impact revenue and margins in these categories.
  
• The ongoing efforts to correct the ERP system issues and late shipments could increase operational costs and distract from core business activities, potentially affecting net margins by increasing expenses related to system corrections and operational inefficiencies.
  
• Declines in the Brand Portfolio sales, influenced by the ERP upgrade issues and weakness in seasonal categories, suggest vulnerability to market trends and operational risks, potentially affecting overall company revenue and growth projections if these issues are not resolved effectively.
  
• Initiatives to mitigate impact on profitability through cost reduction and restructuring may result in short-term gains but could pose long-term risks to growth and innovation by potentially limiting investment in new product development and market expansion efforts, thus affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $36.67 for Caleres based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.9 billion, earnings will come to $156.1 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $31.8, the analyst's price target of $36.67 is 13.3% higher.
  
• 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.