Genesco : Transcript - Q2 FY2024 Conference Call

Genesco Inc. - Second Quarter Fiscal 2024 Earnings Conference Call, August 31, 2023

C O R P O R A T E P A R T I C I P A N T S

Darryl MacQuarrie, Senior Director, FP&A and Investor Relations

Mimi Vaughn, Board Chair, President and Chief Executive Officer

Tom George, Senior Vice President, Finance and Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Mitch Kummetz, Seaport Research

Corey Tarlowe, Jefferies

P R E S E N T A T I O N

Operator

Good day everyone and welcome to Genesco's Second Quarter Fiscal 2024 Conference Call.

Just a reminder, today's call is being recorded.

I will now turn the call over to Darryl MacQuarrie, Senior Director of FP&A. Please go ahead, sir.

Darryl MacQuarrie

Good morning everyone and thank you for joining us to discuss our second quarter fiscal '24 results.

Participants on the call expect to make forward-looking statements reflecting our expectations as of today, but actual results could be different. Genesco refers you to this morning's earnings release and the Company's SEC filings, including its most recent 10-K and 10-Q filings, for some of the factors that could cause differences from the expectations reflected in the forward-looking statements made today.

Participants also expect to refer to certain adjusted financial measures during the call. All non-GAAP financial measures are reconciled to their GAAP counterparts in the attachments to this morning's press release and in the schedules available on the Company's website in the Quarterly Results section. We have also posted a presentation summarizing our results here, as well.

With me on the call today is Mimi Vaughn, Board Chair, President, and Chief Executive Officer, and Tom George, Chief Financial Officer.

Now I'd like to turn the call over to Mimi.

Mimi Vaughn

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Genesco Inc. - Second Quarter Fiscal 2024 Earnings Conference Call, August 31, 2023

Thanks Darryl and good morning everyone. Thank you for joining us.

Before I discuss our second quarter performance, I'd like to take a moment to address the other news we released yesterday - the announcement of Mario Gallione's planned retirement at the end of the fiscal year. Mario has had an extraordinary 44-year career with Genesco, most recently as President of Journeys Group for the last six years. His exceptional merchant leadership and footwear expertise has been instrumental in building Journeys into the leading teen fashion footwear retailer it is today. We will all miss his incredible passion for Journeys and for our people, and thank him for his extensive contributions to our company. With Mario working to ensure a smooth transition and Mike Sypert's recent promotion to Journeys' Chief Operating Officer, along with Journeys' experienced senior leadership, I know we already have a strong team in place as we determine Mario's successor.

Now, moving to our results, although the headwinds pressuring our Journeys business persisted, as the second quarter progressed and summer kicked in, sales trends modestly improved relative to Q1, picking up in June and sustaining into July as the back-to-school season began. Paired with our other divisions, this enabled us to deliver results ahead of our reset expectations during this lower volume time of the year.

Despite a challenging consumer backdrop, Johnston & Murphy and Schuh each delivered another quarter of record sales, exceeding our expectations and helping to counter the pressure at Journeys. J&M and Schuh are concrete and recent examples of our ability to manage through adverse cycles, respond to changing consumer dynamics and come out on the other side in an even stronger competitive position. At J&M, in response to the pandemic, we swiftly and effectively repositioned the brand to meet the changing needs of its consumer living in a more comfortable, more casual world; while at Schuh, we evolved its customer value proposition and improved its product access and consumer marketing. Those efforts have yielded multiple quarters of growth and outperformance for both businesses, and now we're similarly acting with urgency to elevate and evolve Journeys. I am confident we will achieve the same success and value creation as we execute on our strategic plan.

The Journeys consumer remains squeezed by inflation, opting to conserve spending, making judicious choices on what to buy and primarily shopping when there is a need or wanted item to purchase. Meanwhile, competitive discounting, most pronounced in athletic footwear, continues to compete for share of wallet and suppress demand for other product. On a positive note, our consumers' appetite for product newness remains strong and we and our brand partners are moving quickly to inject the Journeys assortment with more of these in-demand goods.

On our last call, we discussed the other immediate actions we're taking to mitigate the pressure on profits. We've made good progress on plans to close approximately 100 Journeys stores and identify $40 million of annual cost savings. We've worked hard to rationalize inventory and successfully drove inventories below last year's levels at the end of the second quarter, led by Journeys, and eliminating the need to aggressively promote. We also returned capital to shareholders, repurchasing 8% of outstanding shares during the quarter for a total of 10% this fiscal year. While these measures will position us well when the consumer environment and sales recover, we are not complacent. We know we need to take further action to meaningfully accelerate Journeys' improvement and drive its top line growth.

The foundation of our Journeys' plan is our Footwear Focused strategy and its strategic pillars that emphasize continued investment in digital and omnichannel, deepening consumer insights, driving product innovation and reshaping our cost base. We advanced several strategic initiatives in Q2 including growing our overall comparable digital business by 14%, expanding digital penetration to 21% versus 18% a year ago. We are building on this foundation with a plan to effectively elevate Journeys' performance, going well beyond and also accelerating several initiatives already in place.

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Genesco Inc. - Second Quarter Fiscal 2024 Earnings Conference Call, August 31, 2023

Before I speak to those plans in detail, I'll touch on the recent highlights for both J&M and Schuh.

Starting with Johnston & Murphy, the brand delivered a solid quarter against a tough multiyear comparison. J&M achieved record Q2 sales and at plus 12%, its fifth consecutive quarter of double-digit comp gains, driven by strong growth in its store channel, led by higher conversion and average transaction size. Sales growth would have been even stronger if not for a challenging wholesale business. As has been the case across the industry, retailers are exercising caution with their order books given the uncertainty of the environment, versus last year when many were grappling with low inventory and refilling their pipelines.

Overall, J&M's assortment continues to really resonate with its more affluent customer base. The casual and casual athletic categories drove results, accounting for almost 90% of the direct-to-consumer footwear assortment. The brand continues to see strong growth in apparel and accessories, up more than 20% year over year, representing more than 40% of total DTC sales.

As we've discussed before, the effort to fundamentally shift J&M's business is driving strong and sustainable results. With the work done to reposition J&M as a multicategory lifestyle brand, there now exists a significant opportunity to increase J&M's brand awareness, which is low relative to some competitors, and change the broad perception that it remains primarily a dress footwear brand. We are committed to investing to unlock this untapped market potential and excited about the multiyear growth story ahead.

Moving now to Schuh, the business had an outstanding quarter marked by 17% comp growth with solid sequential acceleration as the summer season kicked in and warm weather boosted sales. Offering a compelling assortment, Schuh drove robust sandal sales and both increased casual and athletic sales, aided by higher average selling prices. Schuh delivered record operating income, as well as the highest operating margin of all our businesses, led by solid full price sell through. Strength was broad based across stores and digital, with store and web traffic up over last year. At almost 40% of sales, Schuh's digital business is the high-water mark for the digital acceleration we're striving to achieve. Looking at the current quarter, Schuh's Back-to-School season is off to a good start, led by the Kids business as targeted marketing and bundled promotions have been met with positive response.

The notable momentum of this business over the last several quarters is testament to Schuh's growing strength and recognition in the market as a fashion footwear destination for the youth consumer. Better access to the top brands and products and a relentless focus on customer engagement through marketing and loyalty initiatives has enabled the business to outexecute competitors and capture market share despite ongoing economic pressure. Compared to last year, Schuh moved up three spots to rank number 10 in U.K. footwear market share in May and June according to Kantar, and we believe the business is well positioned for continued share gains moving forward. Congratulations to the Schuh team for this exemplary performance!

Now I'd like to more fully discuss our initiatives at Journeys.

Let me start by saying: Journeys' value proposition to customers is intact. It has driven our success and separates us from competitors. The Elevate Plan is a multipronged strategy to drive traffic, sales and profitability, with the goal of delivering not only stronger near-term improvement, but also further cementing Journeys' positioning as the dominant player in teen fashion footwear over the longer term. The key elements of the plan include, number one, strengthening customer engagement and expanding relationships with our target teen consumer, which is key in challenging times and is our first priority. We launched a deep dive on consumer and market insights to build on our expansive knowledge of the teen, to better understand purchase intent and how behavior has changed post pandemic to shape future actions.

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Genesco Inc. - Second Quarter Fiscal 2024 Earnings Conference Call, August 31, 2023

As part of our engagement efforts in the lead-up to back-to-school, we fully launched Journeys All Access loyalty program. While it's early on, the initial reads are very promising, with the program approaching 1 million members since its full launch in stores two months ago. We're aiming to interact with customers more frequently, driving repeat purchases, inducing them to consolidate their branded purchases with Journeys to achieve higher loyalty tiers. Moving forward, in Q3, we will expand All Access to offer rewards specific to some of our top brand partners. With even more first party data coming in through loyalty sign- ups, we're further leveraging our investments in customer analytics and more targeted personalized marketing.

Number two, elevating product and strengthening brand relationships, including expanding and adding more differentiation to the assortment, increasing the number of exclusives for Journeys, and testing new brands and styles. Here we're aggressively working to reposition the Journeys product assortment to meet the customer's appetite for newness. But beyond product, we're more fully leveraging the partnerships with our brands; collaborating to tell key stories through social media, events, and other activations to strengthen both the Journeys brand and the vendors' brands. While repositioning the assortment will take some time, we've already had several top-to-top meetings with our brand partners and, in the process, secured greater access to highly-allocated,in-demand styles that allow us to impact the assortment by the back part of this year.

Number three, sharpening Journeys brand marketing. We're heightening these efforts, as our insight work told us that when our customers engage, they have a great experience with Journeys, but we have an opportunity to build greater awareness with our target consumer. The partnership with thredUp we launched this past quarter unites our Journeys brand purpose messaging with activities to drive commerce. In addition, in efforts to boost traffic in the back half, we're increasing paid social and paid search spend, both of which are delivering positive returns.

Number four, implementing incremental initiatives to drive digital and omnichannel growth. We have the opportunity to significantly grow our ecommerce business like we've done at Schuh and are building on the successful initiatives that have driven Journeys' digital business to double-digit growth. These include increases in digital advertising and leveraging the new loyalty program. We are especially excited for the imminent launch of buy-online-pick-up-in-store. BOPIS will be phased in over the next few months, beginning in September, and rolled out before Holiday. This leverages our store fleet while providing consumers with an additional convenient pick-up option just in time for the holidays.

Number five, optimizing our Journeys footprint and driving productivity and efficiency. While closing underperforming mall stores, driving ecommerce and piloting off-mall locations are in response to the changing shopping habits of our teen consumer, our overall objective is to grow Journeys revenue and share of market. Through improving customer data and analytics, when closing a store we're better able to communicate with our customers and direct them to a nearby store or online to maximize sales recapture. It's important to note that given the fixed costs we eliminate by closing a weaker performing store, we need very little sales transfer to achieve a breakeven operating income. Our recently completed time studies to optimize store selling efficiencies will ultimately yield positive results, notably driving stronger conversion and higher productivity per hour as we eliminate excess work and focus more effective selling tactics on peak volume times. Our new point-of-sale hardware and software including in-store mobile devices is facilitating further improvement as we deploy this and other technology toward these efforts.

Importantly, I want to underscore again the conviction I have in our ability to address Journeys' challenges and achieve success, just as we have demonstrated with our other businesses. With the great talent, creativity and dedication of the Journeys' team, its unique strategic positioning as the leading destination for fashion footwear for teens and unparalleled strength of its brand relationships, I believe strongly in our future prospects. I look forward to keeping you updated on our progress as we continue to refine and evolve this plan and its priorities.

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