Genesco Inc.

Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2023 Conference Call. Just a reminder, today's call is being recorded. I would now like to turn the call over to Darrell McQuarrie, Senior Director of FP&A. Please go ahead, sir.

Good morning, everyone, and thank you for joining us to discuss our First Quarter Fiscal 2023 results. 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, supply chain issues, and the current economic environment 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 want to remind everyone we have posted a presentation summarizing our results that is accessible on our website. With me on the call today is Mimi Vaughn, board chair President and Chief Executive Officer, who will begin our prepared remarks with an overview of the period and the progress we are making on our strategic initiatives to drive the business this fiscal year. And Tom George, Chief Financial Officer, who will review the quarterly financials in more detail and provide guidance for fiscal 23. Now, I'd like to turn the call over to Mimi.

Thanks, Daryl. Good morning, everyone, and thank you for joining us today. Following record results in fiscal 22, the new year is off to a very good start. While the year-ago period posed a difficult comparison due to government stimulus-fueled consumer spending, we are very pleased with our recent performance and the long-term trajectory of our business as we navigate some near-term turbulence and move past the COVID-era fiscal tailwinds. We continue to experience healthy demand for our merchandise offerings, which reflects our leadership positions in the teen and young adult footwear space and other segments of the consumer market we serve, the strong connections we have forged with our customers, and our ability to successfully evolve with the ever-changing fashion desires of our consumers. Our footwear-focused strategy has created a more resilient business that is fundamentally stronger than prior to the pandemic, and we are excited about our growth prospects going forward. These efforts, coupled with the dedication and ingenuity of our outstanding people, have allowed us to outperform pre-pandemic sales and profitability despite more challenging economic conditions, inventory shortfalls, and tax refund delays, which historically have benefited our Q1 performance. Overall, for the first quarter, we exceeded both top and bottom line expectations with notable strength at SHU and in our branded business. And had we had the inventory to fulfill demanded journeys, our performance would have been even stronger. These results underscore the progress we have made positioning the company for profitable growth through a heightened focus on increasing digital penetration, improving the economics of our store channel, and growing our branded sales. A few key highlights of the quarter include, compared with pre-pandemic Q1 fiscal 20, revenue up 5% despite having 90 fewer stores and adjusted operating income up 14%. Versus pre-pandemic, digital sales up almost 75%, now representing 19% of total retail sales versus 11%. while branded wholesale sales increased almost 70% over the same time helped by our Togasta acquisition. Gross margins continue to show strength versus last year due to continued full-price selling and limited markdown activity, which combined with expense leverage compared with pre-pandemic levels fueled adjusted EPS of $0.44 and nicely positive operating income, which historically has been more challenging in low-volume quarters. Additionally, our business accelerated through the quarter with sequential improvement in retail sales in April and May to date versus last year as inventory levels improved and stimulus compares began to ease. And we continue to strengthen our business model with the more efficient use of capital to drive these results. COVID provided the opening to transform our business at a much more rapid rate. We are taking advantage of the market opportunities the pandemic presented, and we continue to strategically align ourselves toward future growth in all our channels. From a channel perspective, we have always known our customers enjoy our differentiated store experience and the exceptional service they receive in person. And like we saw with journeys throughout last year, the strength of our brands continue to draw enthusiastic shoppers back to stores. as the UK economy reopened more fully this quarter and the Johnston & Murphy customer eagerly returned to shopping. It was, however, our ability to meet and serve the consumer with compelling product in all our channels, stores, online, and through our growing wholesale channel that led to the strength in the quarter versus expectations and has us excited about the opportunities ahead for continued success. Turning now to discuss each business in more detail, beginning with Journeys. Overall, the Journeys team delivered a commendable quarter while navigating ongoing inventory challenges. I've been describing the current fashion cycle as shifting away from fashion-athletic more into casual, which plays into Journeys' strengths, positioning Journeys well among its athletic competition to deliver this assortment. Casual continued its climb as a larger percentage of the business in Q1, showcasing the current diversity of teen fashion trends with particular strength in some of the newer brands in the Journeys assortment. Both average selling price and average transaction size benefited from year-over-year growth, and price increase actions and strong full-price selling upheld last year's healthy gross margin gains. The lack of inventory held back Journey's performance as we didn't have enough winter product to fill late season demand in February and spring styles were slow in arriving due to supply chain disruption. Case in point, we received 40% of our Q1 inventory in April with much of that coming toward the latter part of the month. While it was an uneven quarter in terms of monthly performance compared to both last year and pre-pandemic due to the combination of this, the stimulus offset, and tax refund timing, the good news is that each of these headwinds lessened as the quarter progressed and sales were strongest in April, enabling journeys to meet our profitability expectations for the quarter, with momentum nicely picking up further in May. Importantly, Journeys is now in a considerably improved inventory position. Turning now to SHU, we're extremely pleased with the continued progress the team is making, capturing market opportunity in the UK and strengthening the business's foundation for growth. Q1 was highlighted by record first quarter revenues, up 35% on a constant currency basis compared to last year, and up 14% over pre-pandemic levels. Driving this outstanding performance was a better inventory position that included increased access to higher tiered styles from several key vendors, coupled with pent-up demand as the UK economy further reopened and young people resumed going out and other activities. Shoes sought after product offerings, strong inventory position, and increased marketing continued to drive consumers to its brand, illustrated by significantly improved store traffic levels. Stores, which were open for the entire quarter this year versus about 20% of the time last year, were a big contributor to SHU's success. However, this was not at the expense of online, as SHU's advanced digital capabilities allowed it to hold on to more than 60% of last year's outsized gains to drive digital sales up over 110% compared to pre-pandemic levels. Like Journeys, shoe strength is in its ability to deliver the fashion brands desired by its youth consumer, and shoe similarly is capitalizing on the shift to casual, which is driving a larger portion of its sales. A big highlight of the spring selling season has been strong consumer appetite for sandals, ever since the weather turned warmer. And it was another quarter of strong full-price selling, which along with lower promotional activity, fueled nice gross margin gains over the last two years. In addition, SHU's operating income gain this year was even more notable, factoring in last year's significant COVID relief. Shifting now to our branded business, we are more and more excited about the potential of Johnston and Murphy as we reposition the brand for growth. Our plan to reimagine J&M for a more casual, more comfortable post-pandemic environment continues to produce very positive results. Strength across digital, retail, and wholesale fueled top-line revenue up more than 45% year-over-year, well above expectations. with sales almost on par with Q1 fiscal 20, despite inventory levels ending roughly 30% below the comparable period and averaging even lower than that during the quarter. The brand is expanding its focus from not just the footwear consumers need for work, but for footwear and apparel they desire for everyday life, with compelling technology as an integral part of the offering, providing comfort and other performance features. Q1's healthy growth in casual, athletic, and casual propel these categories to almost 80% of footwear sales. Strong growth in apparel and other non-footwear categories, now at about 40% of the total mix, validate J&M's positioning as a footwear-first, multi-category lifestyle brand. What's most exciting is our success attracting younger customers to the brand, with the under-35 customer base growing over 30% in the quarter. In summary, J&M continues its trajectory to meet and exceed pre-pandemic sales and profits at a faster pace than expected. Had it not been for significant additional air freight costs in the quarter, operating income would have been much closer to pre-pandemic levels. Rounding out our divisional discussion, licensed brands posted an excellent quarter with sales surpassing expectations and operating margins increasing more than 200 basis points over last year. The licensed brands team has completely remade this division since the start of the pandemic by adding attractive licenses and more robust product and sourcing capabilities through an acquisition we completed in late fiscal 2020. Q1 results demonstrate the increased strength of our licensed portfolio and the team's ability to capitalize on white space opportunities in the market. Switching gears, we are enthusiastic about the progress we're making on our ESG initiatives. We recently completed an inaugural North American carbon footprint assessment, and our third carbon assessment in the UK is in process. We look forward to sharing these results, which serve as a foundation for our future environmental efforts, along with other updates when we publish a comprehensive ESG report in the coming weeks. Turning now to the current quarter, May is off to a good start as the monthly sequential improvement we saw through the first quarter has continued. Historically, the second quarter is another lower volume quarter for the company, as consumers turn their attention to summer activities before returning for the start of back-to-school shopping in late July. Looking further at fiscal 23, we continue to feel positive about delivering top-line growth on top of a very strong fiscal 22. We don't anticipate the factors that led to such a strong full-price selling environment to continue at the same level, especially in light of current economic conditions. and we are working hard to overcome the cost pressure that are prevalent today and in certain areas increasing. We are planning the back half to be stronger than the front half as the stimulus comparisons wane, inventory levels improve, logistics cost pressure comparisons ease, and continued price actions help offset higher costs. Notably, fiscal 23 will be an investment year for J&M as we advance the work on the brand's repositioning. Based on our favorable Q1 results and current outlook with some additional pressures, we are reaffirming our fiscal 23 full-year guidance for adjusted earnings per share to be between $7 and $7.75. We still believe somewhere close to the middle of the range is where the year will land. Our better than expected first quarter results are further evidence that our footwear-focused strategy is advancing our business even as the operating environment has become increasingly more challenging. Driving this strategy are six strategic pillars that emphasize continued investment in digital and omnichannel, deepening our consumer insights, driving product innovation, reshaping our cost base, and pursuing synergistic acquisitions all to transform and meaningfully grow our business. You have heard how several initiatives positively impacted first quarter results, and before I turn this call over to Tom, I would like to highlight a few others. Starting with pillar one, accelerate digital to grow the direct-to-consumer channel, I have talked about how our online business generates nicely positive operating margins well into the double digits due to our focus on full-price selling, marketing spend to drive positive returns, and shipping and return policies to reinforce profitability. Not only have we greatly increased our IT investments and resources to grow digital, but we also added to our investment in digital marketing to drive traffic and attract new customers. Our marketing spend in Q1 increased 60% versus pre-pandemic amounts, in large part driven by digital marketing to continue driving profitable digital growth. Our second pillar maximized the relationship between physical and digital channels. Journey's consumer research told us that a third of its target consumers visit local non-mall shopping centers two to three times per month and enjoy the convenience of shopping closer to home, combined with enhanced omnichannel services like easier curbside pickups. We piloted a number of these off mall sites which are larger than our mall stores and can carry a full assortment of adult and kids products. Pleased with the sales and four wall results, we have signed more than 25 additional locations we will open this year and early next. Tools like our new real estate analytics platform are allowing us to optimize site selection as we build out this footprint and we are excited about the potential and the number of locations this new format could have for us. Finally, under Pillar 3, build deeper consumer insights to strengthen customer relationships and brand equity. SHU has rolled out its first-ever loyalty program, the SHU Club, which fully launched at the end of Q1. This program ties online and store purchases back to customer records which allows SHU to deliver increased personalization and an enhanced customer experience. This program has seen greater success with more sign-ups than initially expected, with SHU Club members making purchases at an average order value 12% higher than non-members. Despite launching less than one month ago, SHU Club purchases are currently accounting for one-third of sales, and we believe this program has great potential going forward. SHU also opened an Irish distribution center in Q1 to support operations there post-Brexit, which will not only save on duties, but will also allow for additional offerings such as same-day delivery, which SHU already rolled out to 55 UK stores. So to close, I would like to thank each of our employees for an excellent start to fiscal 23. Your drive and determination enable us to consistently execute through dynamic and challenging environments, and this quarter was no exception. I'm proud to work with such an inspiring group of people, and I look forward to continued success with you this year. I will now turn the call over to Tom.