Genesco Inc.

Good day, everyone, and welcome to Chinesco's second quarter fiscal 2023 conference call. Just a reminder, today's call is being recorded. I will now 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 second 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. After last year's record fiscal 22 results, we are pleased with our second quarter performance, our strong first half of this year, and the longer-term direction of our business. Following a stimulus-induced spending environment in which consumers had ample disposable income to drive strong sales gains that significantly benefited the first half of last year, we are pleased we continue to drive our business forward and maintain the large majority of those gains. Our footwear focus strategy is working and has created a much more resilient and fundamentally stronger business. The work we have done over the last few years to increase our digital penetration, strengthen our consumer connections, grow our footwear brands, and reduce and reshape our retail costs structure has put the company in a better position to both outperform in favorable economic backdrops and successfully navigate more difficult market conditions like we're facing today. Our second quarter performance highlights the benefits of our multi-divisional business model. Stronger than expected results at Hsu and Johnston and Murphy helped overcome some softness late in the quarter versus expectations at Journeys due to an increasingly challenging macro environment, which is affecting certain segments of consumers more than others. That said, Journeys' year-over-year sales trends improved meaningfully each month in step with an improved inventory position on key brands and styles. This, combined with the strength at SHU and J&M and careful expense control, allowed us to offset the lighter overall sales and deliver adjusted EPS that surpassed our expectations, boosted further by a favorable compensation expense adjustment Tom will discuss later. The SHU team did a tremendous job capitalizing on recent product and marketing initiatives outperforming its competition in the UK marketplace, fueled by pent-up demand and a warm summer. At the same time, the reimagining of the J&M brand continues to attract a wider and younger audience at a time when its consumers are returning to life and looking to refresh their wardrobes. And across all our businesses, we have held on to the bulk of the digital gains we drove during the pandemic as we have grown this highly profitable channel. Our progress is especially evident compared to where our business was before the pandemic began. A few key highlights of the second quarter include, compared with the pre-pandemic second quarter of fiscal 20, revenue grew 10% despite having 5% or 80 fewer stores. Digital sales grew more than 75%, now representing 18% of total retail sales compared to 10% in fiscal 20. Our branded wholesale sales increased more than 100% over the same time period, spurred by our acquisition of the Levi's business. Gross margins were in line with our expectations, despite an increasingly promotional environment in the U.S., and operating income more than doubled that of fiscal 20, leading to adjusted EPS of 59 cents versus 15 cents in the second quarter of fiscal 20. And in addition, our business accelerated throughout the quarter with sequential monthly improvement in retail sales compared to a year ago as we flowed in fresh product and accomplished the significant task of re-inventorying and stimulus compares began to ease. And while at the same time investing in our business, we returned a notable amount of capital to shareholders, opportunistically repurchasing $45 million of stock during the quarter, representing about 6% of shares outstanding. Turning now to discuss each business in more detail, beginning with Journeys. While the second quarter started well, with May and June benefiting strongly from the good work Journeys merchants have done to re-inventory and achieve pre-pandemic inventory levels for the first time since the onset of the pandemic, sales did not further accelerate as much as we expected in July. This trend included the last two weeks of the month, which is the beginning of the back to school season. Sales have since re-accelerated in August and are nicely up above last year. but we expected an even sharper acceleration given our vastly improved inventory position and a normal back to school this year. We are seeing some evidence of the journey's consumer getting squeezed by inflation, making fewer trips to the mall, waiting for tax-free events to shop, delaying purchases until the time of need, and trading down to more affordable price point footwear. The strength of Journey's vendor relationships and the breadth of its assortment have allowed the team to quickly pivot its current offering to more accessibly priced product that aligns with the current more budget-conscious consumer. While we anticipated stronger store traffic, our motivated store associates have made the most of each customer crossing the lease line, driving improved conversion and higher transaction size helped by higher ASPs as we ended the quarter. I've been describing the current fashion cycle as shifting away from fashion athletic more into casual, which plays into journey strengths, and casual continued its ascent in Q2 as a bigger part of the assortment. Although markdown and promotional actions have increased from essentially none last year, clean inventory and more full-price selling delivered both better than expected and higher journey's gross margins compared with pre-pandemic times. Over in the UK, SHU's strong second quarter capped a great first half for the business. The UK retail market has experienced major disruption during COVID, with extended lockdown periods and many retail bankruptcies reshaping the landscape. The SHU team has made the most of this disruption, utilizing its advanced digital offering to drive online and out-executing when stores were open. Two is also reaping the benefits of better product, brand purpose, and marketing strategies. Driving the stellar Q2 performance was a better inventory position that included increased access to higher-tiered styles from several key vendors, coupled with pent-up demand as young people enjoyed the warm summer weather and dressed fashionably for summer activities. Due sales continued to exceed expectations on both a constant currency and reported basis, despite the considerable decline of the pound versus the dollar. Constant currency revenue hit a Q2 record, up 9% compared to last year and up 14% over pre-pandemic sales, as strong demand fueled consumer spending despite historic levels of inflation. Operating income also grew, adjusting for last year's rent and other COVID credits. Like Journeys, shoe strength is its ability to deliver the fashion brands desired by its youth consumer, and casual was up as a greater percentage of the mix as well, led by sandal growth and helped by higher prices. Moving on to discuss our brands, we're incredibly excited about the potential of Johnston and Murphy as we reposition the brand for growth. Our efforts to reimagine J&M for a more casual, more comfortable post-pandemic environment is delivering outstanding results with Q2 sales up 22% compared to last year and operating income more than double pre-pandemic levels. Operating income was also up over last year, adjusting for last year's sizable pickup from inventory reserve reversals. Growth stemmed from all channels this quarter, with stores up 13% year-over-year, direct up 16%, and wholesale up nearly 60%. With return to the office figures well below 50%, the brand is experiencing this growth from a shift in strategy and from not just the footwear consumers need for work, but for footwear and apparel they desire for everyday life, driving market share gains. As a measure of this progress, nine of the top 10 SKUs in J&M's DTC business in Q2 were casual and casual athletic styles. Intensified consumer messaging and fresh and continuous streams of new and innovative product with technology differentiating J&M's offering, are driving this growth. Rounding out our brand review, our licensed brands team has wholly remade this division since the start of the pandemic by adding attractive licenses led by Levi's, acquiring more robust product and sourcing capabilities, and diversifying distribution with a focus on more moderate-priced retail channels. This transformation was evident with an operating profit this quarter compared to an operating loss in Q2 of fiscal 20. While its consumer has also been affected by the inflationary environment and we are currently in the midst of a Levi's distribution repositioning, we see an exciting run for this business going forward. So shifting now to the current quarter, back to school in the U.S. has delivered positive results so far and we were pleased to see the pickup in August over July's slower start. However, our expectations for increases for the season and back half over last year for journeys were even higher at high single-digit growth. Given how low we were on inventory and out of stock on core items throughout the back half of last year, we believe we left significant sales on the table and had planned to capture the upside during this year's back-to-school and holiday season. In addition to the behavior I described for the journey's customer in reaction to the increasingly difficult macro environment, we are seeing customers come out and shop when there's a reason to buy and retreat to conserve cash during the in-between period. Therefore, we're modifying our guidance for the back half in large part to reflect the trends we're currently seeing in journeys. which, while positive over last year, are lower than our original forecast. Both the higher-income J&M consumer and the shoe consumer have exhibited resilience in their shopping appetites, backed up by lifts in traffic over last year. We anticipate these patterns will largely persist, although we have tempered expectations to account for the increasingly difficult economy that may impact shoe consumers in the UK. Our fresh inventory will be a positive, and we believe the strength of our concepts position us well to get more than our fair share of consumer demand, especially when the customer has a reason to shop. We can manage inventory by adjusting receipts as needed and do not believe we will need additional markdowns to keep inventories right-sized. Based on this more conservative back half outlook, we now expect adjusted fiscal 23 earnings per share to be between $6.25 and $7. Somewhere close to the middle of the range is where we anticipate the year will come in. We remain confident that our footwear-focused strategy will continue to create value as we navigate this inflationary period and exit from it. 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 heard how several initiatives positively impacted second quarter results, and I would like to briefly highlight a few others. Starting with Pillar 2, maximize the relationship between physical and digital channels. We are advancing Journey's off-mall strategy. This initiative was developed to take advantage of the pronounced shift in traffic to more local, neighborhood, community, and power shopping centers. Journey's consumer research also told us its target consumers visit local non-mall shopping centers several times per month and enjoy shopping closer to home. After piloting and analyzing results of some initial locations, we signed more than 25 of these off-mall sites, which are larger than our mall locations and can carry a full assortment of adult and kids' products. We opened five of these locations so far and plan on opening another 10 by fiscal year end. Given that Journeys is predominantly mall-based, we believe this is a meaningful opportunity. At SHU, we opened a new distribution center in Ireland to better support omnichannel sales there, which also improves the profits of our Irish operations post-Brexit. Under Pillar 3, build deeper consumer insights to strengthen customer relationships and brand equity. SHU is generating positive success with its new loyalty program, the SHU Club. This program combines online and store purchases together and allows SHU to deliver increased personalization for an enhanced customer experience by recognizing and rewarding SHU's most loyal customers. This program has seen greater success than initially expected, with just under 750,000 sign-ups since fully launching in April, and is now set to exceed the one million sign-ups targeted for the year. The ability to now recognize more customers at the point of sale has resulted in data capture doubling since the launch of the shoe club, giving us a richer set of first-party data. Total spend for club members accounts for almost 30% of total company sales currently, with members making purchases at an average order value 14% higher than the average. Johnston & Murphy's Insider Program launched last year is seeing similar success, with 75% of new customers signing up. Journeys is enhancing brand equity by elevating self-expression through the lens of youth culture and has significantly ramped up its collaborations with content creators across social and streaming platforms, resulting in higher engagement and awareness on multiple channels, including TikTok and Instagram. One of the most significant elements of this campaign is a partnership with Carl Jacobs of Mr. Beast fame as Journeys' creative ambassador for to activate exclusive content to engage his combined reach of 28 million followers across various social platforms. These activations introduced Journeys to Carl's gaming community in a creative and authentic way. In an effort to place Journeys top of mind just before back to school, Journeys leveraged its music strategy as the presenting sponsor of the Sad Summer Festival with events in 18 key markets. Journeys' increased investment in digital and social are showing gains in brand awareness and intent to shop. Based on its most recent customer research this summer among 13 to 22-year-olds, Journeys remains a top shopping destination, significantly outpacing other footwear retailers as more welcoming, cool, fun, and a place to discover new brands and styles. Under Pillar 4, Intensify Product Innovation and Trend Insight Efforts, J&M's product innovation strategy has driven substantial growth in the casual athletic category, doubling its size in the DTC channel to almost 40%, thanks in large part to the Amherst and Activate collections. In fact, the number one Amherst style sold more than double the pairs as our number one dress shoe further highlighting that this strategic shift into casual and casual athletic has been dramatic and is resonating with the consumer. In summary, we're making meaningful progress across our businesses and strategic initiatives to be the destination for our consumers' favorite fashion footwear. Beyond this, we're proud of the progress we've made on ESG. We published an inaugural ESG report on Genesco.com outlining our most recent ESG work policies and metrics. We continue to incorporate ESG as a factor in key operating decisions, such as redesigning and reducing shoebox sizes and participating in energy reduction programs at the store level. We're committed to do more and look forward to posting you on future progress. To close now, We as a company are very good at navigating challenges and will manage through this period of high inflation and a pressured consumer much in the way we manage and emerge from the pandemic a stronger and a more profitable company. At the core of this are our incredible people, and I'd like to thank you for our strong start to the year. Your determination and ingenuity allow us to consistently out-execute through dynamic and choppy environments, and I look forward to continued success with you during the remainder of this year. I'll now turn the call over to Tom.