Genesco : Transcript - Q1 FY2024 Conference Call

Genesco Inc.

First Quarter Fiscal 2024 Earnings Conference Call

May 25, 2023

Genesco Inc. - First Quarter Fiscal 2024 Earnings Conference Call, May 25, 2023

C O R P O R A T E P A R T I C I P A N T S

Darryl MacQuarrie, Senior Director, FP&A and Investor Relations

Mimi Vaughn, Board Chair, President and Chief Executive Officer

Tom George, Senior Vice President, Finance and Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Mitch Kummetz, Seaport Research

Ryan Lountzis, Jefferies

P R E S E N T A T I O N

Operator

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 Darryl MacQuarrie, Senior Director of FP&A. Please go ahead, sir.

Darryl MacQuarrie

Good morning everyone and thank you for joining us to discuss our First Quarter Fiscal '24 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.

Mimi Vaughn

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Genesco Inc. - First Quarter Fiscal 2024 Earnings Conference Call, May 25, 2023

Thanks Darryl. 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 Journeys 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 Focused strategy and believe in our future prospects. While the first quarter was even tougher than we anticipated for Journeys, both Johnston & Murphy and Schuh exceled, delivering record Q1 sales and demonstrating the benefit of our multi-division, multichannel operating model. In addition, we advanced many of the initiatives underlying this strategy that drive value: we continued to grow our digital business and we further strengthened the connections with our consumer through progress on loyalty and customer insights.

As a company, we have in the past successfully navigated multiple adverse retail cycles with the most recent being the COVID shutdowns in calendar 2020. As the leading destination for fashion footwear for teens, Journeys' 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 early March assumed 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 teen consumer 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 product.

Given the pressure Journeys is under, we are taking significant further action to mitigate the near-term environment and consumer shift. We are 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 are 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 Schuh 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.

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Genesco Inc. - First Quarter Fiscal 2024 Earnings Conference Call, May 25, 2023

Now, moving on to our businesses in more detail, and starting with retail. The Journeys 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 boots into spring merchandise, continuing instead to trade down to lower price points and take advantage of the abundance of discounted athletic product elsewhere in the market. This elevated inventory in the channels continues to suppress demand for other product. 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 its 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 Journeys' assortment. However, the demand for that product versus our core styles was greater than we typically see in a given season.

The core differentiator of the Journeys 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 Journeys 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 Journeys' presence in key marketing channels to drive awareness, traffic and sales, such as boosting paid search & 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 Schuh, 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. Schuh continues to benefit from a resilient consumer despite a challenging U.K. 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 the 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, total Schuh 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 Schuh team for driving the business to even greater heights.

Switching to our branded platform, Johnston & Murphy remained a bright spot, delivering its ninth consecutive quarter of double-digit top line growth, as well as the strongest gross margin and operating income gain among our businesses. This record start to the year was driven by strength across all

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Genesco Inc. - First Quarter Fiscal 2024 Earnings Conference Call, May 25, 2023

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 Insiders 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 wear-to-work trends is driving outstanding and sustainable results, and there's lots of runway ahead of us. With the product foundation in place, we are 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.

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 are 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 are 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 are not factoring in a shift in consumer patterns or economic improvement.

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 Focused 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 are implementing.

Beginning with Journeys' 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 consumer, 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 are also better leveraging our investments in data analytics and personalization to increase consumer 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 at 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 are taking to drive growth is increasing the number of

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