Over the past six months, Caleres’s stock price fell to $12.95. Shareholders have lost 14.1% of their capital, which is disappointing considering the S&P 500 has climbed by 23.2%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Caleres, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Caleres Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Caleres. Here are three reasons there are better opportunities than CAL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Caleres grew its sales at a weak 2.1% compounded annual growth rate. This was below our standards.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Caleres has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2%, lousy for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Caleres’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Caleres doesn’t pass our quality test. Following the recent decline, the stock trades at 5.9× forward P/E (or $12.95 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
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