Genesco Inc.

Good day, everyone. Welcome to the Genesco third quarter fiscal 2021 conference call. Just a reminder, today's call is being recorded. I will now turn the call over to Dave Slater, Vice President of FP&A and Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us to discuss our third quarter fiscal 2021 results. With me on the call today is Mimi Vaughn, our Board Chair, President, and Chief Executive Officer. 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 the company's SEC filings, including the most recent 10-K and 10-Q filings for some of the factors, including the impact of COVID-19 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 attachment to this morning's press release and in the schedules available on the company's homepage under Investor Relations in the quarterly earnings section. I want to remind everyone we have posted a presentation summarizing our results that is accessible on our website. We hope you are all staying safe and healthy. Now I'd like to turn it over to Mimi to discuss the quarter and the current outlook for the holiday season.

Thank you, Dave. Good morning, everyone. Thanks for joining us today. As we announced earlier this week, we are pleased to report that Tom George has been appointed Interim Chief Financial Officer of Genesco, replacing Mel Tucker, who stepped down last month. Tom has almost 30 years of CFO experience and deep roots in brands and retail. most recently in footwear at Decker's Brands. We look forward to adding Tom's valuable expertise to support the continued growth of our business and very much look forward to Tom joining our leadership team. Tom's appointment is effective December 14th, and in the interim, I have assumed the responsibilities of Chief Financial Officer, working closely with Dave, Brent Baxter, our Chief Accounting Officer, and Matt Johnson, our Treasurer, who together have formed the Office of the CFO. These leaders and the rest of our talented finance team are ensuring that the transition will be seamless. Dave will return later in the call to review the financials. I'm incredibly pleased with how well our organization performed during the third quarter as we navigated through a back-to-school season like none other. It's a privilege to lead a team that is facing the challenges brought by COVID-19 head-on, serving our consumers extremely well through digital and omnichannel, making progress on our strategic initiatives, and quickly returning the company to profitability. Through all this, we continue to operate with protocols to ensure our highest priority, the health and safety of our people and customers. As you'll hear today, Journeys in Shoe are businesses serving teens and young adults that represent the large majority of our revenue have both performed well under recent pressure. This speaks to the strong strategic market positions both concepts have built over time and their ability to capitalize on the accelerated shift to online spending. In today's channel-less world, where there are no barriers to shopping anywhere the consumer wants, Journeys and Shoes' recent performance underscores the tremendous loyalty they've developed with their customers and the compelling propositions they offer to new customers. Johnston & Murphy enjoys a strong strategic position with great heritage as well. However, the pandemic has hit J&M's dressier competitive space harder, extending the timeframe for turning this business around. All in all, our teams executed with excellence, managing their business as well as they reacted to rapidly changing dynamics during the quarter. In the U.S., there was nothing normal about the cadence of back to school. The selling season that's usually marked by a sharp acceleration in weekly sales starting in late July and running through Labor Day did not pack the punch that it usually does. as school districts across the country delayed or suspended the return to in-person learning. As we expected, we did see an extension of the selling season through September and into October. However, in total, back-to-school was down year over year and more heavily tilted to online. Meanwhile, back-to-school timing in the UK was consistent with historical patterns, but far more consumers shopped online for their school needs than ever before. Stores were open for about 95% of the possible days in the quarter compared to about 70% during the second quarter. While we continue to face traffic levels that are down well into the double digits, our store teams are driving record levels of consumer conversion that helps to materially offset this headwind. Our businesses online, on the other hand, experience strong gains in both traffic and conversion. We've said before, our e-commerce sales were nicely profitable prior to the pandemic, and as we reap the benefits of the many investments we've made, e-com is driving even greater profitability. New customers continue to deliver increased volumes, as new website visitors were up almost 40%, driving an almost 60% in new customer purchases. The combination of these drivers led to a total revenue decrease of 11% year over year. This result was better than we expected due mainly to stronger sales at Journeys and represents a meaningful improvement from last quarter's 20% decline. The drop in store volume was partially offset by another strong quarter of digital growth with comps up over 60%. Thanks to decisive cost-cutting actions early in the outbreak, along with one-time benefits such as rent abatements, total expenses were down a little more than revenue. While growth margins were down compared to last year, due primarily to lower margins at J&M and a mixed shift among our businesses, the drop improved sequentially from the second quarter. As less promotional activity at SHU was necessary, and Journey's gross margins increased. With sales and gross margin improving over last quarter, combined with increased profitability in our e-com channel, our bottom line swung solidly back into positive territory. The return to profitability fueled positive operating cash generation in the quarter, equally encouraging with the health of our inventories, which were down more than 20%, allowing for fresh receipts of holiday merchandise. In addition, the significant effort we invested with our landlord partners seeking rent abatements during the time our stores were closed paid dividends and will bring even greater benefit next quarter. We appreciate our landlord partners' willingness to find mutually beneficial solutions and hope to expeditiously reach conclusion with those discussions we have not yet concluded. So turning now to discuss each business in more detail. Journey's third quarter results are influenced heavily by back-to-school. With more than two-thirds of elementary, middle, and high school students attending school only virtually to begin the year, the quarter got off to a difficult start. Same-store sales were down double digits in August, although e-commerce remained strong. The business hit an inflection point in early September as comparisons began to ease, accelerated significantly over the remainder of the month and remained strong in October as we captured our fair share of late back to school demand. While we were not able to fully make up for the lost volume in August, we were encouraged that store comps were nicely positive in both September and October and e-commerce growth was even stronger than earlier in the quarter. Comfort continued to be the fashion choice of the pandemic and Journeys' offering of casual products resonated strongly with consumers. While teams always have a big complement of fashion athletic footwear in their closets, when fashion swings toward non-athletic, or what we call casual footwear, Journeys is especially well positioned among its competition to deliver this assortment. This spring, a range of comfortable sandals and other casual products sold through well. This fall, our consumers' appetite for boots began early and more robustly in the season than we have seen in many years. While the casual part of Journey's assortment has been gaining ground over Fashion Athletic all year, Q3 delivered the largest quarterly growth so far. These gains have been especially pronounced in women and kids, as we've seen throughout the year. On the other side of the Atlantic, back-to-school at SHU unfolded similarly to previous years, with schools starting on time and most students returning to in-person learning. However, in terms of consumer digital behavior, it was more extreme, as significantly more back-to-school spending shifted online in the UK. With its best-in-class digital capabilities, SHU was ideally positioned to capitalize on this digital shift and captured the vast majority of lost store volume through digital sales. E-commerce generated almost 45% of shoe sales in the quarter, even with most stores being open. While store traffic was still down considerably, back-to-school gave consumers a reason to shop and helped drive traffic decreases to less negative levels. The blend of better store and much better online sales allowed SHU to gain market share during the quarter. With positive comps in total and only a slight decline in year-over-year revenue from closed stores, coupled with cost savings, SHU delivered a solid year-over-year operating profit increase, a noteworthy achievement under difficult conditions. With less competitive discounting pressure and more scarcity in supply of the brands itself, SHU pulled back significantly on promotional activity versus the second quarter, which helped performance as well. Like Journeys, SHU's casual assortment gained ground over its fashion athletic assortment, with boot sales driving a good portion of the pickup. While performance improved from the second to the third quarter with the introduction of its fall assortment, Johnson & Murphy continues to find itself in a tough environment. Its customer has fewer reasons to shop, with many continuing to work from home, and most large social gatherings and events postponed or canceled. In addition to store traffic being down over 50% for the quarter, some of J&M's airport and street locations have yet to reopen, which further impacted retail sales. A bright spot was boot sales, which began selling earlier in the season this year. While J&M historically has been known for its dressier products, The team initiated work years ago to evolve Johnson & Murphy into a full lifestyle brand with a range of footwear and apparel offerings from dressier to more casual. Highlighting the traction we've already made, casual and casual athletic represented about 60% of footwear during our last fiscal year, and apparel and accessories drove 40% of total sales. Looking forward to the coming year, J&M has focused 90% of new product development on the expansion of its casual offering to include casual athletic, leisure, rugged outdoor, and performance, which follows upon its highly successful reentry into golf this spring. Leading these efforts is a new head of product development who joined J&M earlier this year and brings a successful track record developing casual brands. As the J&M customer returns to work and socializing, which we hope with the recent medical advances will be sooner than later, J&M's assortment will be ready for the post-pandemic lifestyle. So turning now to the current quarter, we believe we have the right assortments and are ready for this holiday season. That said, consumer demand has been very different this year due to the pandemic and its impact on consumer behavior and the economy, which has caused us to take a conservative approach to our outlook. In November, we faced headwinds from the reclosure of stores in North America and the U.K. as we carefully monitor and adhere to each country's and region's health requirements, and as a result were closed for more than 10% of the possible operating days in the month. The biggest impact was in England and Ireland where we had the best potential to make up some of these sales online and most stores have reopened at this time. Following strong gains in September and October, sales moderated and November got off to a slower start against robust comparisons a year ago. We were encouraged to see trends improve quite a bit around mid-month, providing the business with good momentum heading into Black Friday. For the Black Friday weekend itself, as expected, traffic was more subdued than usual. In spite of the choppiness, November sales were in line with our expectations with an even heavier mix of digital versus store sales. Unlike prior years, most retail venues and almost all of our stores were closed on Thanksgiving Day. The lion's share of the holiday season remains ahead of us. Outside of Cyber Week, digital sales were normally strongest during the earlier part of December. Our holiday store volume is typically concentrated in peak days and weeks between Thanksgiving and Christmas and builds as the month progresses. Whenever and however the consumer decides to shop, we believe we're set up well to meet the demand thanks to investments we've made in technology to drive growth across e-commerce and in our stores. With recent investments across mobile, our platforms, our websites, and our distribution centers, we're prepared to handle what we anticipate will be record holiday digital volumes. We've helped the customer adjust to the pandemic online by introducing services like Klarna at Journeys this summer, which is a pay-in-four-installments option that is driving much larger transaction size. and offering technology on our website that helps customers determine what size is best to order. With the ability to fulfill online orders via our distribution centers or from any of our almost 1,500 store locations, we're well positioned to meet the surge in demand. Earlier this year, we upgraded our inventory locating and order brokering system to provide greater inventory accuracy, which is critical during this peak sales period. This system also allows functionalities such as tiering stores to protect inventory in our highest volume stores, enabling us to better optimize sales across our network. Even with the acceleration in online demand, the majority of holiday sales will still take place in our physical locations. Our stores become even greater strategic assets as we get closer to Christmas, and customers don't want to risk online orders not arriving in time. This is the first year we'll have holiday comparison data in our workforce management system since we implemented it last year. This technology proved invaluable in managing the unusual traffic patterns during back to school and will enable us to rapidly add or remove labor to optimize store staffing levels during this unusual holiday season. Thanks in part to changes in our compensation programs this year, We've reduced turnover meaningfully and have a more tenured, more experienced workforce on our sales floor for holiday, ready to provide the excellent customer service we're known for. This holiday will be about execution, something we do well, that will differentiate us among others. We've also developed some terrific marketing campaigns adjusted for what we learned during the pandemic to drive traffic and sales in this important holiday selling season. We've increased digital marketing spend substantially and are leveraging our CRM systems to inform our digital, social, and other advertising efforts. So thanks to our competitive strengths, we've navigated well through extraordinary market conditions this year, including back to school and back to work uncertainty, and will continue to navigate through this unusual holiday season. As conditions normalize and we make further progress on our strategic initiatives, I am confident we'll emerge strong and be well-positioned with more than enough liquidity to take advantage of the many opportunities the pandemic has presented. To conclude now, I'd like to recognize and to thank our employees across our company, especially those in our stores and field, in our call centers and distribution centers, for your dedication, skill, and ingenuity. We appreciate your efforts all year round, but really especially in this busy holiday season in the midst of the pandemic, when I'm certain you'll go the extra mile to delight our customers. I'm also so proud of the work our teams are doing in the communities we serve, including donating shoes and masks and supporting our diversity and inclusion initiatives. Finally, we wish you and your families happiness and good health this holiday season. And with that, I'll pass the call back over to Dave.