Genesco Inc.

Good day everyone and welcome to the Genesco first quarter fiscal 2020 conference call. Just a reminder, today's call is being recorded. Participants on the call expect to make forward-looking statements. These statements reflect the participants' expectations as of today, but actual results could be different. Genesco refers you to this morning's earnings release and to the company's SEC filings, including the most recent 10k filing. for some of the factors that could cause differences from the expectations reflected in the forward-looking statements made during the call today. Participants also expect to refer to certain adjusted financial measures during the call. All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release and in schedules available on the company's homepage under Investor Relations in the Quarterly Earnings section. I will now turn the call over to Mr. Rob Dennis, Genesco's chairman, president, and chief executive officer. Please go ahead, sir.

Good morning, and thank you for being with us. I'm joined today by our chief operating and financial officer, Mimi Vaughan. Let me take a moment to highlight developments with respect to our senior leadership team. On May 1st, Mimi Vaughan, our CFO, was appointed to the additional position of chief operating officer. As you know, we are in the process of hiring a new CFO from the outside, and we are in the closing stages of that process. Until that role is filled, Mimi will hold the dual titles. And the reality is that Mimi has already been bridging both roles as she has been working closely with our various operators on key initiatives such as cost control, real estate management, and performance improvement plans. This move formally recognizes her efforts and strengthens the management team as we move forward with a footwear-focused strategy. So congratulations, Mimi. Now, following the sale of lids in early February, fiscal 20 is off to a good start with improved results in every business with journeys leading the way. In our first quarter, consolidated comparable sales increased 5%. Our eighth consecutive quarter of positive consolidated comparable sales for our footwear businesses. Importantly, our overall brick and mortar performance remained firmly in positive territory and e-commerce sales accelerated from recent levels continuing its strong multi-year run. Our overall comp result was fueled by another spectacular quarter at Journeys as the momentum from the strong back to school and holiday seasons carried into the new year. Shoes comps showed improvement turning positive in Q1 helped by easier comparisons and increased promotional activity aimed at trying to stimulate demand in what remains a challenging UK footwear and apparel market. After a record-setting year, Johnson & Murphy comps were flat as sales of spring merchandise were slow to take off with generally cooler temperatures across much of the U.S. The combination of strong consolidated comps, higher gross margins, and the benefits from numerous cost savings initiatives implemented throughout fiscal 19 resulted in first quarter adjusted EPS of $0.33, which was well ahead of our expectations and up meaningfully from last year's $0.14. In general, first quarter results are impacted by tax refunds, and with the changes from tax reform and the new withholding tables, there was a good amount of uncertainty about the total refunds that would be issued this year. And so we were intentionally conservative in our guidance for the journeys business in particular, as this business is significantly impacted by refunds. Lower refunds would have certainly translated into lower sales for journeys. And there were early delays due to the government shutdown, but when all was said and done, refunds were at a sufficient level in the first quarter to fuel journeys robust comp, resulting in a beat to our expectations. Continuing with journeys, the strength of their product assortment drove another quarter of tremendous results. This was achieved across multiple categories. In areas where cold weather persisted into spring, demand for boots was strong. The same was true for sandals in warmer regions, while sales of the latest sought-after retro and casual athletic styles from a diverse mix of brands were robust throughout much of the country. Both store and e-commerce comps were nicely positive, which led to a 7% increase on top of last year's 6% gain and a significant improvement in year-over-year profitability. And great expense control along with strong sales allowed for expense leverage across multiple line items, including rent, selling salaries, and marketing spend. Results from our new workforce management system rolled out this year are especially worth calling out. Journey has increased its pay per hour, reduced hours, and spent almost a million dollars more in store labor, but leveraged this expense by achieving higher conversion and better labor productivity by putting hours in the right spots in the work week. On the other side of the Atlantic, the operating environment remains much more challenging. The prolonged uncertainty around Brexit continues to depress consumer sentiment, which has caused customers to reduce purchases of apparel and footwear and instead focus their spending on basics and must-have items. The net effect is consumer price sensitivity and a bargain-hunting attitude towards anything beyond those must-have items. Against this backdrop, SHU posted a 2% comp gain, its first positive comp in several quarters. On top of lapping last year's mid-teens decline, the introduction of a mid-season spring sale gave this performance an added boost. While a portion of our top-line result came at the cost of gross margin, rigorous expense management, help from foreign exchange, and property tax concessions allowed SHU to beat last year's bottom line. Clearly, there is still much work ahead to improve the profitability of this business after last year's disappointing results. As we outlined on our last call, we have implemented an aggressive 20-point program taking action to address immediate near-term profitability while executing more medium-term initiatives to enhance shoes positioning with the consumer and with the brands themselves. Mimi will provide an update on this program later in the call. Meanwhile, Johnson & Murphy posted a flat comp on top of last year's high single-digit gain. J&M is now recognized as a casual lifestyle brand and has driven its success with a compelling offering of footwear and apparel for men and women. Following a solid start to the year, sales trends slowed midway through the quarter due to the later Easter before picking up back in April. A shift in timing of a catalog drop out of the first quarter and into the second also affected results. Overall, sales were softer than expected as unseasonable weather and much of the U.S. stifled demand for spring merchandise. Even with a flat comp, profitability was up nicely. thanks to improved gross margins and good expense control. Finally, licensed brands delivered a better bottom-line performance on lower sales in Q1, as the business benefited from fewer markdowns and less closeouts this year. It's worth noting we generated over $200 million of operating cash flow last year, and we added significantly to that cash position with the sale of the Lids business. Consistent with our practice of not sitting on cash, we've been actively buying back stock and returning capital to shareholders. Across two repurchase authorizations implemented in recent months, we began buybacks in December, and as of last Friday, have repurchased over 3 million shares for a total of approximately $150 million, which represents a 17% reduction to average shares outstanding last year. We are very pleased with our start to the year. In addition to the strong Q1 results, we sold the Litz business, allowing us to turn our attention to being a footwear-focused company, both operating footwear retail businesses and owning or licensing brands. Based on our better-than-expected Q1 performance, coupled with the repurchase of more shares than originally planned, we now view the higher end of our initial EPS range of $335 to $375 as our likely outcome for the year, compared with our previous view of something close to the middle. Overall comps continue to be positive in May and have strengthened through the course of the month. Journeys, once again, is leading the way, even with meaningfully higher stacked comparisons for the last couple of years in Q2. Comps for J&M and SHU are more lackluster than we would like them to be in this low-volume month that begins the second quarter. The year-to-date performances of these two businesses, plus the potential for more stranded costs this year related to selling lids, makes us now a little more conservative about the outlook for the remainder of the year. We are also mindful of the looming possibility of tariff increases on additional Chinese imports and no visibility into the resolution of Brexit in the UK anytime soon. For these reasons, we decided to hold our current range versus increasing it despite our favorable beginning to fiscal 20. Before Mimi goes over the financials and guidance in greater detail, I'd like to share our thoughts on the potential for tariff increases if footwear imported from China is in the proposed fourth tranche aimed at the balance of Chinese imports and how this would directly and indirectly impact our business. In terms of direct exposure, we develop and directly source merchandise for Johnson & Murphy and licensed brands, which together accounted for a little less than 20% of total sales in fiscal 19. Of those goods, approximately 50% come from China with a heavier weighting to licensed brands. Therefore, our direct sourcing from China is only for merchandise representing less than 10% of total sales. The balance of our merchandise is imported by our third-party vendors. With respect to the Journeys business, which accounted for 65% of total sales last year, we estimate that approximately 30% to 40% of the product we buy from third-party vendors is sourced from China. The remainder of our business, which is based in the U.K. and the Republic of Ireland, would not be affected. So in total, only about a third of our merchandise potentially would be affected in some way by these tariffs. So with this next round of proposed tariff schedules for a public hearing in mid-June, followed by a public comment period, this is an evolving situation. It is important to note, however, we have not incorporated the impact of increased tariffs into our guidance for fiscal 20. While we are hopeful for a successful resolution of these trade negotiations with China, in the event tariffs are implemented with respect to our direct sourcing, we would work with our supply chains and look to exercise a variety of options to mitigate the effect. These options include moving production out of China and into other countries and working with our vendors, agents, and factories to absorb a portion of these additional tariffs and looking for further efficiencies in the supply chain. We would expect our third-party vendors to undertake similar actions. And obviously, currency movements could further mitigate the impact. So with all the moving parts and pieces, it's too early to quantify the full impact, which under any circumstances won't be a factor until the back part of the year. And in the meantime, we are pulling forward fall product for early receipt and expediting delivery in advance of tariff rulings wherever we are able. And so with that, let me turn the call over to Mimi to give more specifics on the financials and our guidance.

Thanks, Bob. Good morning, everyone. I've got a couple of things to call out first. We've posted more information in a brief presentation summarizing results and guidance you can access online at our website. We've combined the content of our CFO commentary into these materials and our press release, making them more accessible and are no longer publishing a CFO commentary. In addition, part of the 8K we filed this morning contains non-GAAP fiscal 19 results by quarter for last year, restated to reflect the sale of LID Sports Group. You can find this on our website as well. As a reminder, since we completed the sale on the last day of the fiscal year, GAAP required that we include LIDS' results in discontinued operations and that we restate our historical financials as if we never owned the business. This restatement process involved taking certain expenses that were previously shared with and allocated to LIDS and re-spreading them across our remaining divisions. It also involved, including on both a historical and future basis, the cost of the LIDS headquarters building, which we still own, even though there are no operations associated with it. We plan to eventually sell the building, but in the meanwhile, we absorb its costs. The net effect of all this, for fiscal 19, operating income is lower by about 20 basis points for most divisions, and corporate bears the cost of the building. Overall, this reduces profitability for the remaining operations versus prior to the restatement. Nevertheless, Liz was both a higher gross margin and a higher SG&A expense business than average. Without it, gross margins are lower, SG&A expense is lower, and operating margins are higher on a percentage basis for continuing operations. We published restated gap numbers at the end of the fiscal year, but thought it would be helpful to give the information for the non-GAAP results by quarter for last year as well. So, as Bob said, we were very pleased with our first quarter performance. Results of every one of our businesses were improved year over year, with journeys driving the largest increase in operating profits. Adjusted EPS grew considerably to 33 cents from 14 cents propelled by strong comps, better gross margins, and higher SG&A leverage from ongoing cost savings initiatives, even as we incurred a meaningful amount of additional bonus expense. All three of these factors contributed to the beat versus expectations. Q1 consolidated revenue was up 2% to $496 million. Excluding the effect of lower exchange rates, revenue was up 3%. Consolidated comps were up 5%, with store comps up 4% and direct comps up 15%. Positive comps were offset to some extent by lower wholesale sales and closed stores. Direct as a percent of total retail sales was 11% in Q1, up 90 basis points, demonstrating the good progress we continue to make driving e-commerce. Importantly, we are driving profitable growth. we could grow e-com even more rapidly with higher marketing expense, but choose instead to keep an emphasis on profit. Journeys posted a noteworthy comp increase of 7% on top of a 6% gain last year, marking the eighth consecutive quarter of increases and including strong double-digit e-commerce growth. Highlights of Q1 store performance included high single-digit increases in conversions, which increased unit sales and drove the higher comp in spite of less store traffic. Growth was nicely diversified across boots, branded and fashion sandals, and athletic footwear. With flat traffic, higher conversion also drove choose store comp and offset lower ASPs. Robust double-digit e-commerce comps were a real bright spot and contributed to an overall Q1 comp increase of positive 2% versus a negative 13% a year ago, a nice turnaround after last year's successive negative quarterly results. SHU ran a first-time mid-season sale in April in the lead-up to the Easter holiday to be competitive with the promotional posture of other retailers in the market. This sale effectively stimulated purchases and contributed positively, even with the give-up in gross margins. Consumers' brand choices continued to be polarized with strong preferences only for certain athletic, retro-athletic, and casual brands. Better in-store conversion for J&M was not enough to offset a lower transaction size and less traffic, which was caused in part by a later catalog drop that moved some sales into the second quarter. J&M's digital channel posted positive gains for an overall flat J&M comp versus a 7% gain last year. Sales in general were challenged as colder weather impeded the sales of spring merchandise. Nevertheless, casual footwear, particularly hybrid shoes with athletic-inspired bottoms, continues to be an outstanding performer in the assortment. Q1 consolidated gross margin increased 40 basis points to 49.4%. Journey's gross margin increased 20 basis points due to lower markdowns. Gross margin was down 70 basis points at SHU as a result of the promotional activity. At J&M, gross margin was up 10 basis points due largely to a higher mix of retail business. And finally, more direct-to-consumer shipments, fewer markdowns, and less closeout product drove a licensed brand's gross margin improvement of 390 basis points. Total adjusted SG&A expense decreased 30 basis points to 47.7% with strong leverage from rent and contributions from selling salaries and several other items. In addition, we had a small pickup from the transition services income and rent from LIDS that we were using to fund the cost of providing those services. Offsetting this leverage is higher bonus expense given the strong performance in the quarter. Without higher bonuses, expense dollars would have been down thanks to cost savings actions. As a reminder, at the beginning of fiscal 19, we launched a profit enhancement program to reduce annual expenses in which we successfully identified savings that exceeded our targeted goal. These savings totaled $32 million, not including LIDS. We know we must reduce the store cost structure and improve efficiency in e-commerce to combat profit dilution from operating two channels and driving traffic to stores. Top areas of savings included rent, renegotiation of our freight carrier contract, DC expenses, and targeted headcount reductions. We continue to have, in partnership with our landlords, very good success with renewals and rent reductions. We've negotiated 64 renewals year-to-date and achieved a 10% reduction in cash rent or a 5% on a straight-line basis. This was on top of a 15% cash rent reduction or 8% on a straight-line basis for almost 170 renewals last year. An important aspect of these renewals is a shorter term, which allows us to think about rent increasingly as more variable than fixed and gives flexibility in our cost structure. We've continued targeted profit enhancement program activities into this fiscal year and added to them an effort to eliminate shared and stranded costs as a result of the LIDS divestiture. In total, we allocated or shared somewhere between $12 and $15 million of expense with LIDS, primarily in areas like finance, IT, HR, and the call center. We have in place a focused initiative to reduce these costs as well as unallocated corporate expenses as possible, given our now smaller revenue base. So in summary, Q1's adjusted operating income was $8.4 million versus $4.8 million a year ago. Adjusted operating margin increased 70 basis points to 1.7%. OI dollars increased for every division, offset somewhat by higher bonus accruals at corporate. Turning now to the balance sheet, inventory is in very good shape. Q1 total inventory was down 4% on a quarterly sales increase of 2%. Journey's inventory was down 2% on a sales increase of 6%. J&M's inventory was up 2% on a sales decrease of 1%, and SHU's inventory was down 8% on a sales increase of 3% on a constant currency basis, as SHU successfully managed down inventory to be better positioned in a tough U.K. environment. Capital expenditures were $7 million, and depreciation and amortization was $13 million. As Bob pointed out, we've been aggressively returning capital to shareholders. We exhausted a $125 million repurchase authorization, and our board approved an additional $100 million authorization in Q1. As of last Friday, May 24th, we had repurchased 535,000 shares under the new authorization for approximately $24 million at an average cost per share of $44.33. Altogether, we've repurchased 3.3 million shares since December for $149 million at an average cost of $45.17 per share. We have $76 million remaining under this new $100 million authorization. We ended the quarter with $157 million in cash and no U.S. borrowings versus $22 million a year ago. So touching now on SHU's 20-point program, we've implemented an aggressive set of actions aimed at immediately addressing near-term profitability. At the same time, we're executing initiatives to enhance SHU's standing with the consumer and with the brands itself to better position SHU over the more medium term. The SHU team, with a great sense of urgency, is making solid headway on both fronts, and I will highlight selected progress. The most critical goal is reversing the negative comp trend that began four quarters ago. To that end, SHU is adding new categories like socks and apparel to fuel add-on sales, investing in its made-to-order business to strengthen this product offering, testing new selling techniques and incentives to drive in-store conversion, rolling out targeted promotional activity like its recent mid-season spring event, and rapidly replenishing its database of contact information that's shrunk due to the new UK data privacy requirements. Notably, we just anniversaried the GDPR implementation date and have been replenishing lost names by collecting customer information in stores and online in a newly compliant way that grows the database each month. We're attacking SHU's cost structure by doubling down on rent reduction and store rationalization efforts and continuing with the cost reduction efforts that successfully identified over $3.5 million of savings in fiscal 19. In addition, we've decided to exit the German market where we had three stores to focus attention on our core operations in the UK and Ireland. Key initiatives to improve juice positioning with its consumer and its key brands include a focused effort to strengthen connections with its youth consumer through more effective digital campaigns and brand awareness programs. The Call to Arms campaign launched in London and Manchester this spring is just one example of these efforts. The first new store prototype designed to enhance the in-store shopping experience and to better showcase shoes' compelling branded product offering opened in Livingston last month, followed by Bristol this month with Manchester Next. Along the same line, we're working hard to strengthen relationships with existing brands, leveraging both local and more global relationships with journeys to gain broader access to popular styles and more exclusive product offerings. Finally, work is well underway on a new CRM system so we can better understand the different ways customers interact with Stu in both the digital and physical worlds. With multiple actions on multiple fronts, We believe we are working on the right set of actions in efforts to turn SHU's business around. Moving on now to guidance for fiscal 20. With our better-than-expected Q1 performance coupled with a repurchase of more shares than originally planned, we now view the higher end of our initial EPS range of $3.35 to $3.75 as the likely outcome for the year compared with our previous view of something closer to the middle. We had from the beginning been conservative in our comp guidance for the year's remaining quarters due to more difficult stacked comparisons, for journeys especially. The prospect of tariff increases on imported Chinese footwear and even more turmoil associated with Brexit in the UK makes us more cautious about the remainder of the year although we have not built in anything explicitly relating to further disruption from either of these factors. We are, however, projecting somewhat more conservative comps for J&M and SHU given their performance to date. Another change to guidance is the potential for more stranded costs in this transition year after the LIDS sale. We're presently operating under a transition services agreement with the buyer, and LIDS has been unplugging from shared services and systems faster than expected. As a result, while we have a thorough plan to eliminate stranded costs, we have more potential exposure for this year due to this timing. In the high end of our guidance range, we eliminate more costs. In the lower end, less. This guidance also does not anticipate repurchases of shares beyond the buybacks we have already completed. For the year, we now expect consolidated sales will range from down 1% to up 1%, with consolidated comps, including direct, ranging from up 1% to up 2%. Store comps' underlying guidance still range from roughly flat to up 1%, and we still plan to open around 30 new stores, mostly Journeys and Journeys Kids. We plan to close around 40 stores for a square footage decrease for the third year in a row. However, we will keep a store open with short lease term if the rent deal is right, so this number may change. We still expect gross margin to be up 10 to 20 basis points in total with the improvement coming from the branded business, namely J&M and licensed brands. But with the low store comp and potential for more stranded costs, we now expect SG&A expense will de-lever in the 40 to 60 basis point range. This all results in an operating margin percent within a few tenths of last year's level and EPS that ranges from up low single digits to up in the mid-teens due largely to the impact of share buybacks. We estimate the fiscal 20 tax rate at 27%. An important callout for modeling is that with the revised comp, unless we hit the top end of the guidance comp range, EPS for Q2 is likely to be negative since it is easy to deleverage and tough to earn money in this quarter with low top line volume. As you can see from the restated quarterly fiscal 19 non-GAAP numbers we filed today, while both Q1 and Q2 are low volume, Q2 was the quarter in which we earned the least profit. Capital expenditures will be around $45 million as we plan to spend a few more dollars on digital and omnichannel investments while still investing to refresh our store fleet. We estimate depreciation and amortization at $52 million. Lastly, we are assuming an average of approximately 16.9 million shares outstanding, assuming no stock buybacks beyond what we have made to date, but we can use repurchase availability opportunistically going forward. Now I'll turn the call back to Bob to elaborate on our footwear-focused strategy.