Genesco Inc.

Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2024 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 First Quarter Fiscal 2024 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 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.

Thanks, Daryl. Good morning, everyone. Thank you for joining us. While this quarter was undoubtedly a challenging one, I'd like to provide context on the factors impacting the current operating environment, including the shifts we've seen in consumer dynamics within our journey's business, what we've learned from them, and most importantly, the immediate actions we're taking to improve our performance against a difficult macro backdrop across the industry. Before we get into the details, I'll start by underscoring that despite the near-term turbulence, which we have reflected in our revised outlook for fiscal 24, I am confident in our footwear focus strategy and believe in our future prospects. While the first quarter was even tougher than we anticipated for journeys, both Johnston and Murphy and SHU excelled, delivering record Q1 sales and demonstrating the benefit of our multi-division, multi-channel operating model. In addition, we advanced many of the initiatives underlying this strategy that drive value. We continue to grow our digital business, and we further strengthen the connections with our consumer through progress on loyalty and customer insight. As a company, we have in the past successfully navigated multiple adverse retail cycles across our businesses, with the most recent being the COVID shutdowns in calendar 2020. As the leading destination for fashion footwear for teens, Journey's track record of performance, including record sales and profits in the year following the shutdowns, demonstrates the resilience of the business, the importance of its value proposition to the consumer, and the ability to rebound from economic headwinds and fashion shifts. I am confident we will come out on the other side of this environment in an even stronger competitive position. That said, we are not satisfied with our Q1 performance. Following a positive end to the holiday season, our outlook in March assume that this year's normalized spring deliveries would have had a more positive impact against the pronounced negative trend that emerged early in the quarter with our team customer at Journeys. However, business did not improve as we changed seasons in the latter half of March and into April. It's clear that given the dramatic change in consumer sentiment in recent months, we continue to contend with a bumpy post-pandemic reset with factors such as inflation, lower tax refunds, and competitive discounting, particularly in athletic footwear, disrupting normal seasonal demand and shopping patterns at Journeys. Consumers continue to stretch their wallets and make harder choices on what to buy or not buy, particularly after filling up their closets with our footwear and other offerings earlier in the pandemic. That said, consumers are responding well to newness and seeking more of it, and we and our brands are moving quickly to create more newness after a focus primarily on core products. Given the pressure Journeys is under, we are taking significant further action to mitigate the near-term environment and consumer shift. We're aggressively working to reposition the product assortment at Journeys as quickly as possible to meet the customer's appetite for newness. In addition, we've now identified more than 100 Journeys stores for closing and up to $40 million in cost savings, adding to the targets we initially laid out. We're also working harder to rationalize our inventory and making good progress against it. Tom will address some of these efforts in more detail. Despite the challenges in Q1, I'd like to highlight some key accomplishments. We achieved record top-line results for both SHU and J&M, highlighting the in-depth work we did to evolve their customer value propositions to set the strategy in both the retail and branded sides of our business and execute well to it. We grew our comparable digital sales by 7% over last year, while digital penetration grew to 21% of total retail sales versus 19% last year. And we advanced important strategic initiatives that will help set the stage for longer-term sustainable growth and profitability objectives, which I will discuss further momentarily. Now moving to our businesses in more detail. and starting with retail. The journey's consumer, already squeezed by inflation and lower tax refund dollars, did not respond to the change of seasons as we had anticipated as we shifted away from booths into spring merchandise, continuing instead to trade down to lower price points and take advantage of the abundance of discounted athletic products elsewhere in the market. This elevated inventory in the channels continues to suppress demand for other products. Additionally, with closets already full, we saw lower store traffic and demand for a number of key styles this year. As a result, Journeys did not see the desired sell-through in some of its core fashion, athletic, and casual products. Journeys countered with reduced receipts of core items and increased promotions and markdowns to clear slower-moving, non-core goods, taking these actions along with others like returns to vendors to rationalize inventories. Encouragingly, we saw meaningful strength for newness in Journey's assortment. However, the demand for that product versus our core style was greater than we typically see in a given season. The core differentiator of the Journey's model is its ability to rotate its assortment quicker than competitors, given our unparalleled vendor relationships, and the team is working diligently to make those adjustments. This will take some time to execute, but should begin to be evident by the back half of the year. While our store traffic remains challenged, our digital business was a bright spot. Having digested the outsized digital growth from the pandemic, we have inflected to growth again. Although consumer behavior remains unpredictable in the near term, we are taking extensive efforts to bolster our journey's business while we weather the current environment. These include working with our brand partners in a bigger way to test new brands and styles, tell additional unique brand and product stories, and garner even more allocated and exclusive products. Conducting a much deeper dive on consumer and market insights to better understand current purchase intent and inform our future actions. Strengthening Journey's presence in key marketing channels to drive awareness, traffic, and sales. such as boosting paid search and paid social media investments, and refining our in-store selling approach using input from recently completed time and activity studies, such as adjusting selling tactics, promoting use of new technology and tools in stores, and incentivizing our store employees to focus further on engaging with customers and driving conversion. Moving now to SHU, the business delivered another quarter of strong double-digit comp growth driven by solid increases in both stores and digital, with store traffic and average selling prices up. SHU continues to benefit from a resilient consumer, despite a challenging UK economy. Operating income improved nicely over last year, driven by stronger gross margins, market share gains, and at roughly 40% of sales, a digital platform that leads our overall company. Efforts to improve access to the top brands and styles and reinvigorate its relationship with its customer through marketing and loyalty initiatives has resulted in a business operating much more effectively. These successful efforts inform the playbook for what we're now executing at Journeys. Touching on loyalty, in its first year, the total shoe club members now stand at 1.6 million. and accounted for 27% of total sales in Q1, well surpassing expectations. Continuing to capitalize on loyalty remains key to driving market share gains and repeat customer purchases going forward. Congratulations to the SHU team for driving the business to even greater heights. Switching to our branded platform, Johnston and Murphy remained a bright spot delivering its ninth consecutive quarter of double-digit top-line growth, as well as the strongest gross margin in operating income gains among our businesses. This record start to the year was driven by strength across all channels, digital, retail, and wholesale, as the business continued to capitalize on the long tail of the post-pandemic workplace casualization trend. J&M's more affluent consumer is proving resilient against the challenging macro backdrop. But most importantly, J&M's assortment continues to resonate, led by casual. And the Upton and Amherst franchises in particular, as well as major strength in apparel, which grew 35%. Finally, we are very encouraged by the traction of J&M Insider's Affinity Program, which is now approaching 800,000 members. Not only is it driving stronger customer engagement and higher average transaction size with our existing customers, but nearly two-thirds of new customers are joining the program, which should result in better retention and customer value. I couldn't be more pleased with J&M's success. The team's effort to fundamentally reposition and reimagine the business as a more lifestyle-oriented brand in the face of a sea change in where-to-work trends is driving outstanding and sustainable results. And there's a lot of runway ahead of us. With the product foundation in place, we're now focused on expanding our marketing reach to tell a bigger story and increase J&M's awareness as we invest for the next leg of growth. And finishing out the divisional recap, Genesco Brands Group surpassed our expectations in the quarter despite going up against large sell-ins to accounts that were replenishing from supply chain disruption in Q1 last year. Results were driven by strengthening performance in the value channel and improved gross margins as freight costs eased, contributing to breakeven operating income. While there's more work to be done, Q1 was an encouraging start to the year that we believe should progress further as headwinds subside over the course of fiscal 24. Now I'd like to touch on our outlook. Given our Q1 results and the lack of visibility into consumer demand, we're taking a much more conservative view for the remainder of the year. The second quarter is off to a similar start as Q1 for Journeys, and looking forward, Even with shopping catalysts like back to school and holiday, we're not planning for a change in the trend. We anticipate consumers will continue to primarily shop when there's a reason, which will be at a time when our product assortment will also better reflect the newness our customer is craving, and we expect some benefit here. Beyond this, we're not factoring in a shift in consumer patterns or economic improvements. Looking at the longer-term horizon fundamental to our success and capitalizing on the opportunities ahead of us is executing on the six pillars of our footwear focus strategy, the right strategy for moving our business forward. We've made progress in several areas, and while it's still early in the year, I'd like to briefly update you on a few of the strategic initiatives we're implementing. Beginning with Journey's loyalty program, Part of the third pillar of our strategy, deepening consumer connections and insights, we soft-launched Journeys All Access earlier this month. Starting in June, you'll see us fully launch the program to consumers as we gear up for back to school. We couldn't be more excited about how this will amplify our connection with our customer as loyalty has done with our other brands. This platform provides fun and creative ways to connect with our teen customer base and incentivizes them to consolidate their branded purchases with Journeys as they achieve higher tiers. With Journeys All Access rolling out, we're also better leveraging our investments in data analytics and personalization to increase customer retention rates and drive size and frequency of purchases. Next, as we work to accelerate our digital business, the first pillar in our strategy, we continue to ramp up a variety of initiatives that journeys to fuel digital growth back to the double digit rates we saw both before and during the pandemic. One example of the steps we're taking to drive growth is increasing the number of styles available to online consumers. Year to date, We're up more than 10% versus the same time last year and up 50% versus two years ago. And we're better highlighting the availability of new product releases and launches of products exclusive to Journeys. Following Journeys' loyalty rollout, we also look forward to the launch of buy online, pick up in store at Journeys and J&M later this year, which aligns with our second pillar of maximizing the relationship between our physical and digital channels. Rolling out our new point-of-sale hardware and software, including new mobile devices, was a foundational step toward enabling BOPUS functionality. We expect to complete the U.S. rollout in a few weeks and the Canadian rollout in July. BOPUS represents as much as 20% of SHU's online sales, and we expect journeys in J&M to see benefits like this over time. Earlier this month, we also completed our receiving automation project at our largest distribution center, which not only reduces labor costs, but also accelerates how quickly we can make new products available to customers for purchase, both in-store and online. In addition, we continue to make progress on moving Journey's footprint off-mall. We're testing and learning in places such as power centers across multiple markets. Supported by ramped up marketing campaigns to build awareness, we have so far opened 13 offline locations out of the 25 pilot stores we currently have planned. We still have work to do, but we are so far encouraged by the early reads and believe this initiative will represent a key element in Journey's growth moving forward. In closing now, before handing the call over to Tom, I would like to thank all of our people. The incredible dedication of each of you drives our business forward and is especially inspiring during challenging times. Although we face some near-term turbulence, I believe in our ability to successfully navigate these dynamics and come out ahead as we leverage our uniquely positioned retail and branded businesses, our commitment to innovation with our footwear-focused strategy, and leadership positions with journeys in teen fashion footwear. And with that, I'll pass it to you, Tom.