Caleres: Long-Term Outperformer

| About: Caleres, Inc. (CAL)

Summary

CAL is a leading footwear company that manages a diverse portfolio of footwear brands, both at retails and wholesales basis, in the United States, Canada, and internationally.

The stock of the company has outperformed the broader market and yielded above 24% to its investors in the last one-year.

The stock is expected to perform even better in the next year based on its strong expected earnings growth and low valuations.

Based on the below analysis of the company’s business, its future prospects, and valuation, the stock of the company has over 31% upside potential to catch its one-year target price.

Investment Thesis

The stock of the Caleres Inc. (NYSE: CAL) has outperformed the broader market and yielded above 24% to its investors in the last one-year. The stock is expected to perform even better in the next year based on its strong expected earnings growth and low valuations. Additionally, the last trading day's drop of $1.47 (4.39%) further enhances the investment prospects of the stock. Based on the below analysis of the company's business, its future prospects, and valuation, the stock of the company has over 31% upside potential to catch its one-year target price of $42.

Source: Yahoo Finance

Business Overview

CAL is a leading footwear company that manages a diverse portfolio of footwear brands, both at retails and wholesales basis, in the United States, Canada, and internationally. Its branded products are available at over 1200 retail stores, hundreds of specialty stores and e-commerce platform. The company offers branded and private-label casual apparel footwear products to women, men, and children globally. Additionally, it offers men's apparel goods and accessories.

Despite the very challenging retail environment in the last few quarters, the company has experienced a solid and resilient business performance. According to the most recent third quarter results, the net sales increased 0.5% to$732.2 million driven by strong back-to-school season in Famous Footwear segment. Operating profit expanded 0.41% to 7.6% as the result of improved gross margin and a solid contribution from the Brand Portfolio' planned reduction in certain healthy living products. The bottom line expanded too with reported diluted EPS of $0.81 as compared to diluted EPS of $0.78 (adjusted diluted EPS of $0.80) in the same period last year.

Source: Seeking Alpha

The company showed an impressive performance from the topline to the bottom line along with strong cash flows, particularly, in the business environment that have been under severe compression due to the macroeconomic uncertainties and tough competition with the industry peers. The company's management is much pleased with the business performance that is in line with their strategy to augment shareholder's wealth, as reported by Diane Sullivan, Chairman and CEO of CAL:

"Despite a somewhat choppy environment, our third quarter performance - with improvement in sales, margins, earnings, and cash from operations - further confirms our portfolio strategy is working as intended and delivering shareholder value. By diversifying across platforms, brands, channels and products, we have been able to drive toward our long-term goal of consistent, profitable and sustainable growth, while minimizing our exposure to potential variability in the marketplace."

Source: Stockrow.com

The company's fundamentals are trending positively and its financial position getting better. Companies that are able to keep their inventories at low and adequate levels enjoy better margins on consistent basis as compared to those who do not. CAL keenly paying attention to inventory management and has further brought-it-down 3.6% to $524.82 million as compared to $546.34 million in the same period last year. The company's cash position is strong as it has $173.4 million cash on its balance sheet, which is $87.1 million up from the same period of the previous year. This strong cash position provides enough flexibility to the company to use it to repay some debt, which is $196.89 million on its balance sheet, increase the dividends, expand the business, or to repurchase more shares under its 2.5 million shares repurchase program that still has 1.4 million shares outstanding authorization (10-Q). Whatever the company does with the excess cash would result in an increase of shareholder wealth, which is the ultimate goal of the company. Ken Hannah, chief financial officer of the company commented on the financial position as:

"Our teams did a fantastic job of continuing to adapt to changes in consumer shopping trends, and - as a result - delivered both improved sales and gross margin. We continued to return value to shareholders and strengthen our balance sheet in the third quarter, as we increased cash and equivalents by more than 100% and reduced our inventory by 3.6%."

CAL is well positioned to grow its earnings at low-to-mid double-digit growth rates for the long period of time. The company's next year earnings are expected to grow at 12.47%, as shown in the following graph. Additionally, for the next five years, the earnings are expected to grow at 11%. These growth figures suggest that the margins will improve further in the long-term future to enhance shareholders value.

Source: Nasdaq.com

In the mid of December last year, the company announced the acquisition of Allen Edmonds, a US-based retailer of premium apparel and footwear products for men, against a total price of $255 million. Much of the details about this recent acquisition will be shared with the public when the company will announce its fourth quarter results. Although, the deal looks a little expensive as it is paid for 70 stores and an e-commerce platform, the management of the CAL is very optimistic about this transaction and expects that it will boost the growth in the future. The Chairman and CEO of the company, Diane Sullivan, commented on this transaction as:

"The addition of Allen Edmonds to the Caleres Brand Portfolio allows us to rapidly increase our exposure in men's footwear, solidifying a new revenue stream to drive overall growth," said Diane Sullivan, CEO, president and chairman of Caleres. "Allen Edmonds is a strong brand operating with a proven business model and we feel it is well-positioned for growth. Not only does Allen Edmonds have brand equity and a loyal customer base, its appeal extends beyond this base to yet untapped consumers. We think we've acquired one of the great gems in men's footwear."

Valuation

CAL looks undervalued based on the relative valuation frontier. First look at the enterprise level valuation. The company's EV/EBITDA is 8.11x and is cheaper as compared to apparel industry multiple of 10.84x. Based on the EV/EBITDA valuation model, the fair value of the enterprise comes to $1.91 billion. The equity value is $1.89 billion after deducting the net debt from the enterprise value. This model results in the equity value per share, the stock's intrinsic value, of $43.95 that offers above 37% upside potential from the last closing price of $31.99.

Source: Author Calculations/ Yahoo finance

The P/E valuation model is a widely used method to value stocks when it comes to equity-level multiple based valuations. The company's forward P/E multiple is 16.01x as compared to industry's forward multiple of 19.55x, which indicates that the stock of CAL is undervalued. The P/E model, using the expected current fiscal EPS of$2.09, gives the fair value of the stock of $40.86, which is a nice above 27% premium to the current price of the stock. Although the dividend yield is not attractive, still it adds value when considered in total return perspective. The other relative valuation measures like P/B, P/S, and P/CF, as shown in the "current valuation" table, are cheaper than the industry averages, therefore, support the investment thesis. Moreover, the consensus analysts' forecast target price for CAL is$40, which also validates my valuations for the company's stock.

Source: Author Calculations

Source: Morningstar

I can't ignore technical perspective when analyzing a stock. The relative strength index (RSI) is a widely-watched indicator when we talk about the technical analysis of any security. The RSI of CAL is 43.85, shown in the stock performance graph above, that indicate the stock offers a good buying opportunity at current price level. Additionally, the short interest is only 2.45% of the float, which is not a significant figure, and indicates that the majority of the CAL investors are bullish at the company's stock.

Based on the above fundamental and technical analysis of the stock, I set my target price of $42 for the stock, which offers a good 31% upside potential in the next one-year investment horizon.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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