Genesco Inc.

Good day, everyone, and welcome to the UNESCO Fourth Quarter Fiscal 2024 Conference Call. Just a reminder, today's call is being recorded. I'll 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 Fourth 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. UNESCO 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, and thank you for joining us. Fiscal 24 highlighted how substantially our consumer shopping behavior has changed since the pandemic. Back in fiscal 22, consumers were flush with cash thanks to fiscal stimulus and spent heavily in the footwear category, which led to a record year for journeys. As we entered fiscal 24, we saw a pronounced drop in purchases at the beginning of the year and have been working to close the gap ever since. The forward buying dynamic, along with a period of higher inflation that followed, competitive discounting to clear elevated athletic footwear inventories, and a general lack of innovation in footwear made for a difficult operating environment that remained challenging as we progressed through fiscal 24. Throughout the year, these evolving purchase patterns led to greater volatility and made it hard to forecast demand, particularly for journeys. In the fourth quarter, after a strong Black Friday and solid kickoff to the holiday season, sales were negatively impacted by a more selective customer that shopped almost exclusively for key footwear items, coupled with a market shift away from boots. As we got into the month of January, the combination of softer than anticipated sales due to disruptive winter storms and higher than anticipated expenses at journeys is what drove EPS below our most recent guidance. Throughout the quarter, our core product assortment was much more pressure than we originally expected at the beginning of Q4. We expect this dynamic to carry into this current year, and given our limited ability to now impact product for spring, We believe it will remain a significant headwind in the first half despite facing easier compares. We are clearly disappointed with these results. However, I want to stress that we faced challenging times before and consistently demonstrated a strong track record of turning around our businesses to emerge even stronger when confronted with economic and consumer disruption. Our response to the pandemic and recent turnarounds at SHU and J&M, evidenced by another year of record sales for both, are clear examples of this, and I'm confident we will achieve the same success with Journeys. It's also important to note, despite a very difficult operating climate, in fiscal 24, our overall sales declined only low single digits and our gross margin compressed by just 30 basis points. The sensitivity of our model is such that smaller movements in sales are magnified with quite a bit of deleverage against our largely fixed cost base. Coupled with our low share count, this had a substantial effect on our bottom line. However, the inverse is true as well. In a sales growth environment, as we've demonstrated before, our model provides significant leverage and earnings upside potential. Our cost savings initiatives are aimed at improving this further. As we turn the page to fiscal 25, the operating environment remains difficult. Given the steeper challenges in our core business, we now have more work to do in our assortment. As such, we're counting on more time for a journey's rebound. All that said, we have a very clear understanding of what we need to achieve Journeys continued turnaround is our number one priority. With the right new leadership already in place and a strong team overall, we're better positioned than ever to accomplish this task. I've said before, while positioned strategically with a spotlight focus on the team, no other retailer serves this customer quite the same as Journeys. Journeys is the one-stop shop for a broad range of both casual and athletic brands. This unique proposition as the destination for teen fashion footwear, particularly for the teen girl, remains solidly intact. As fashion broadens and teens are embracing multiple wearing occasions, we will achieve success with a more diversified assortment that addresses these needs and fills out our customers' closets. Importantly, we already have the backing of our consumer who consistently scores Journeys higher than key competitors in market research and our brand partners who are demonstrating exceptional support. Under Andy Gray's leadership, the Journeys team is working to dramatically accelerate the pace of improvement in response to how the consumer has changed. With a strong merchant background, excellent vendor relationships, and expertise in brand building and product innovation, Andy's insight has already proven tremendously valuable. We're working with great urgency. However, these efforts will take some time given footwear industry lead times. Already in the works though, they will set the stage for more significant progress for back to school and especially for holiday. I will discuss some of these initiatives in more detail shortly. But first, I'd like to point out some important highlights from the quarter and year beyond the record sales years SHU and J&M delivered. We grew our comparable digital business by 5% in Q4, 8% for the year, and expanded digital penetration in fiscal 24 to 23% versus 20% a year ago. We launched Journey's all-access loyalty program and buy online, pick up in store in North America to encouraging initial results. Focus was a bright spot in Journey's and its first holiday in operation, accounting for almost 30% of e-commerce sales in the week leading up to Christmas. Importantly, we made further progress right-sizing our inventory. Journey's ended Q4 with inventory down over 20% to last year, enabling us to generate strong cash flow and enter the new fiscal year in a very clean position. This also helped us deliver solid gross margins ahead of expectations and positions as well to buy into the product we need to drive Journey's sales. Furthermore, we continue to advance our strategies to position the business for better productivity and profitability. We closed nearly 100 underperforming Journey stores and are evaluating up to 50 more closures this fiscal year as we reshape the footprint to align with the shopping patterns of today's consumer. And we made substantial progress in realigning our cost base and are now targeting an increased run rate of $45 to $50 million in annual savings by the end of this year. And now for color on our individual businesses, starting with Journeys. While we were pleased that sales once again improved sequentially in Q4, as they have in every quarter this year, results nonetheless fell short of our initial expectations. Following a strong Thanksgiving weekend, business decelerated in December as customer shopping trends remained choppy. That said, store traffic was positive and consumers responded well to the newness in our assortment, which tells us that Journeys remains a key destination for our team. However, a decline in conversion outweighed this, given our consumer's selective appetite for key items. Once we ran out of high-demand product, we were not able, as we usually are, to motivate an alternate purchase, and discounting did not drive enough sales to be effective. This was evident in boots. While we planned our boot business down in anticipation of a challenging season, it was weaker than expected. By both warm weather and style preferences, food sales, which typically represent 50% of Journey's holiday business, were down 20% during the holiday period. And as I mentioned, we experienced more pressure than we expected in our core assortment, including vulcanized product. The overall sales decline in Q4 was confined to stores, as Journey's digital business performed quite well, up mid-single digits versus last year. We tested numerous engagement and traffic driving programs with all access members, increased SMS usage, and increased influencer and paid social campaigns to generate awareness and drive conversion. In fact, as we exited the year, we saw some acceleration in total comps in January, led by Journey's e-com, which increased 35% during the month. Moving to the UK, despite experiencing a slowdown in Q4 comps against a difficult compare, SHU delivered an exceptional year with strong comp growth throughout the first nine months. Our efforts to strengthen SHU's value proposition has differentiated the business from competitors, grabbing the attention of new customers and enhancing our brand relationships and access to top-tier product. That said, sales in Q4 were challenged by a tough boot business, coupled with a more cautious UK consumer that against recessionary economic challenges was also more discriminating in their purchases. The pressure was primarily in stores as SHU's e-com business remained positive in the quarter, accounting for over 40% of total sales. Kids also remained a bright spot with sales up 8%, while non-footwear categories saw strong growth of 35%. Even amidst a difficult operating environment, SHU held strong market share. As of mid-January, SHU maintained its number 10 rank in total UK footwear market share, according to Kantar, a position it's held since May 2023 after moving up three spots during the year. Loyalty has played a key role in strengthening SHU's market position. Currently accounting for roughly 30% of total sales, SHU club members now stand at 2.3 million and are more engaged than non-loyalty customers purchasing more frequently. Turning to Johnston and Murphy, the business was a standout over holiday with a record fourth quarter as we continued to invest to drive growth. Compelling product and strong sales of non-footwear led to nicely positive comps demonstrated a solid recovery from the ERP implementation challenges in Q3. However, relative to the run rate over holiday, sales were pressured by the disruptive January winter storms. Our efforts to reimagine J&M as a more comfortable lifestyle brand with products suited for today's more casual preferences is resonating really well with our consumers. In Q4, J&M's direct-to-consumer business was strong across all channels, e-com, retail, and factory. Although the casual and casual athletic categories were key drivers in J&M's footwear business, apparel and accessories were an even bigger call-out in Q4. Apparel and accessories increased 18% driven by strong growth in blazers and outerwear and accounted for almost half of J&M's DTC sales. J&M is a great example of how we've taken our strong DTC capabilities built in retail and applied them to a branded concept. With the work of repositioning to an updated multi-category lifestyle brand paying dividends, J&M is positioned to drive meaningful growth with opportunities across categories, age demographics, geographies, and gender. As the cornerstone of our branded platform, the future for this business is incredibly bright. Now, switching back to journeys, Andy and team have taken a deep dive on the business and put sharper focus on a turnaround program and growth strategy that will impact the customer through product marketing and experience. And today, I'll highlight some key initiatives for this fiscal year, which are a mix of both strategic acceleration and disciplined expense management. Number one, drive product leadership and create marketplace differentiation. To continue improving Journey's footwear leadership and assortment, we're implementing new strategies led by our recently appointed chief merchant to meaningfully increase product access and boost investment in key fashion, athletic, and casual brands. This includes diversifying and adding new key styles with our existing brand partners, increasing our leadership position with all our key brands, enhancing in-store social and digital exposure to build awareness with our customer to shop journeys for these brands, and working to add brands beyond those we're traditionally known for. Number two, build a journeys brand and enhance the Omni experience. We're intensifying efforts to build and promote journeys as an industry-leading retail brand, We're currently onboarding a new creative agency to develop a new brand communication strategy. We plan to roll this out in the back part of the year along with an updated brand mission, vision, and purpose. In parallel, we're improving Journey's brand presence and upgrading the customer experience with quick actions in both stores and online, including refreshed messaging and visuals that tell a cohesive brand story across channels and social. We're excited about the investment we're making to personalize and improve the timeliness and relevance of our marketing communications as well. We're also evolving the all-access loyalty program where we signed up over 2 million members in six months, continuing to provide an exciting feature-rich program that differentiates journeys, generates valuable consumer insights, and encourages consumers to consolidate purchases across brands with us. And finally, we'll ultimately pursue an updated store concept and next generation design to further enrich the customer experience. And number three, leverage the power of our people. This initiative leverages the expertise of our store employees to set us apart by providing excellent service as a differentiator. Over the past year, we've introduced new capabilities, including mobile point of sale and BOPUS to improve efficiency and customer engagement. And this year, we'll further improve training and execution and roll out additional features like data-informed suggested selling. Number four, optimize to drive operational and cost efficiencies. We're implementing several initiatives here, including continued efforts to optimize the store footprint, closing unproductive stores, and redirecting traffic and sales, while strategically opening mall and off-mall locations, and prioritized optimization projects focused on selling salaries, rent expense, inventory management, and digital marketing spend efficiency. In summary, overall, I want to emphasize my belief in our team's ability to reshape our business and unlock Journey's considerable earnings potential. In addition, we're executing new initiatives to accelerate growth for SHU and J&M in fiscal 25, all building off our footwear focus strategy. I'll discuss a few select examples. With a data capture rate of 75% plus for customers in North America and growing loyalty and affinity programs across our concepts, we're augmenting our understanding of our customers' needs and driving up repeat purchase rates using our CRM platforms and more advanced analytics. For J&M, we're excited for the launch of the brand's refreshed marketing campaigns this spring. Powered by a new agency, this campaign aims to increase overall brand awareness and heat and attract a broader and younger consumer, while also changing the perception that J&M is still primarily a dress shoe resource. Revamped social media content and organic social campaigns are key drivers of these efforts, along with new digital and in-store rollouts. Finally, building out the shoe club loyalty offering will accelerate member sign-ups and customer engagement. Turning now to our outlook for fiscal 25, we continue to navigate volatile consumer behavior and are not assuming any significant change in the near term. As I mentioned, we anticipate a difficult first half with significant pressure in Q1 given the product challenges it journeys and are planning the back half to be much stronger than the front as we make an aggressive push to reposition our assortment. Our guidance for the year reflects this view with the expected front half results impacting our ability to further grow EPS in fiscal 25, but with the product build we're putting in place, setting us up well for fiscal 26 and beyond. Before closing, I'd like to say that while this past year has truly tested us, I'm extremely proud of our resilience and drive to overcome the challenges we face. None of this would be possible without our incredible, talented people. I'd like to thank you all for your tremendous efforts and for all the great work you will be doing in the coming year. And with that, I'll turn it over to Tom.