Caleres: A Great Trade Ahead of Tuesday Afternoon

Footwear designer, manufacturer and retailer Caleres (CAL) is due to report fiscal second-quarter 2021 results after the close on Tuesday. Last year's end of July period market was tarred by government-imposed store closings due to COVID-19. The second quarter of 2020 saw a 57-cent loss. Just two analyst were still brave enough to venture guesses as to what CAL will announce this week. That's likely because analyst estimates have been so putrid over the previous three reports. They called for a 4-cent profit a share from CAL in fiscal third quarter 2020. The actual result? It was 48-cents, a tiny 1,100% earnings surprise. Seasonally slow, end-of-January results were not as stunningly different from estimates. CAL posted a 3-cent gain versus expectations for a 10-cent loss. End of April 2021 numbers, though, showed a total lack of awareness by analysts. They looked for a 3-cent gain but were blindsided by CAL's 60-cent per share profit. That represented a 1,900% miss. Based on those results, I have little hope that the two remaining experts on Caleres will be correct this time around with their 53-cent projection. History suggests they will be too low again, perhaps by quite a bit. Other footwear companies have shown outstanding profits recently. They blew right through analyst estimates. Dividends and guidance have been rising. That bodes well for Caleres' upcoming announcement. As it stands right now CAL is projected by Yahoo Finance to earn $2.24 a share this year and $2.52 in 2022. Value Line's estimates are a bit higher. An earnings beat this week would likely lead to higher expectations for both years. From 2011 through 2019, Caleres typically sold for about 14 times earnings. Simply returning to that normalized valuation would deliver tidy gains even if earnings per share don't exceed expectations. Yahoo Finance's 10-month target price of $30.50 appears way too low as it only assumes an ending price-earnings ratio for CAL of 9.7 times. My own 17-month goal price equals $35.70. Hitting that somewhat conservative target would generate almost 50% in total return. My price goal is far from an upper limit. At peaks during 2014 through 2018 (red-starred below) CAL fetched from 16.9 times to 19.6 times current EPS. Caleres' all-time high of $41.10 was achieved on EPS of $2.21, a bit lower than is now expected for the year ending Jan. 31. The stock changed hands at $29.36 as recently as June 21. Management never cut the dividend during the COVID-19 crisis. At its Aug. 27, quote CAL yielded a better-than-money-market 1.14%. Since 2014, total shares outstanding were cut from 43.75 million to about 38 million. Quantitatively-focused FastGraphs sees CAL rising to a fair value of $33.60 by Jan. 31. Buying shares ahead of the next quarterly report would position you nicely for a quick pop higher if another excellent report comes out, as I expect. I see little downside risk or chance for a rotten report based on what other footwear companies have already delivered. Option players see CAL as a volatile stock, which could move sharply in either direction. There are generous premiums available for covered call writers or naked put sellers. The furthest duration now offered is for Dec. 16, 2022, not quite 16-months out. Unless you think CAL is due for a large fall, it's hard to imagine any of these put sales ending badly. Shorting even an aggressive, deep in the money $30 put provided an almost 20% margin of safety. If you already own CAL, and are willing to sell higher, there are nice prices on the $25, $30 and $35 strike price call options. There could be worse things than being forced to sell for 29.9% to 58.7% gains from today's quote, plus dividends within 16 months. I previously sold calls against my CAL position, mainly for its Jan. 21 expiration date at $30 and $35 strikes. I was busy all week selling new December 2022 puts at various strike prices to go with other naked puts on CAL that I have due for expiration in January. Caleres is a high conviction, very large dollar position for me. It's not too late to make new commitments via share purchase or sales of puts.

Caleres: A Great Trade Ahead of Tuesday Afternoon

Footwear designer, manufacturer and retailer Caleres is due to report fiscal second-quarter 2021 results after the close on Tuesday.

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