Q1 2022 Genesco Inc Earnings Call

May 27, 2021

Good morning, everyone and thank you for joining us to discuss our first quarter of fiscal 2022 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.

<unk> refers you to this morning's earnings release, and the Companys SEC filings, including the most recent 10-K and 10-Q filings for some of the factors, including the impact of COVID-19 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.

All non-GAAP financial measures referred to and prepared remarks are reconciled to their GAAP counterparts, and the attachments to this morning's press release and in schedules available on the company's homepage under Investor Relations and 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, our board Chair, President and Chief Executive Officer, who will begin our prepared remarks with highlights from the first quarter and.

And Tom George Our Chief Financial Officer, who will review of Q1 results in more detail and provide direction for Q2.

Now I'd like to turn it over to Mimi.

Thanks, Dave and good morning, everyone and thank you for joining us today.

Our company began fiscal 'twenty, 2 with positive momentum following and incredibly challenging year battling the pandemic.

And each successive quarter of our people worked with great tenacity and success to improve top and bottom line results to close the gap to pre pandemic levels drive their recovery and return to profitable growth.

We entered the pandemic year from a position of strength following 11 consecutive quarters of comp sales growth and our footwear businesses.

Our overall performance and a difficult environment reflects the strong competitive positions of our retail and branded concept the strength of our footwear focused strategy and our success capitalizing on opportunities to bolster these positions.

Thanks to the ingenuity and efforts of our people, we exited last year with a solid foundation to build upon.

As a result fiscal 'twenty 2 is off to an incredibly strong start with of first quarter that meaningfully exceeded our expectations.

Our outperformance was driven by better than anticipated results at every division led by record first quarter revenue and profitability at journeys.

Even as the pandemic continued to impact our businesses to varying degrees the pace of our recovery accelerated each month and overall in Q1, reflecting stellar execution combined with a temporary boost from U S government stimulus and pent up demand as the economy reopens fast.

And then anticipated.

I'd like to begin today by outlining some of the key highlights from the quarter.

First revenue and operating profit exceeded pre pandemic levels, increasing 9% and 125% respectively over Q1 fiscal 'twenty 2 years ago, even with our stores opened for a little less and 90% of the possible operating days and the quarter given Clos.

<unk>, primarily in the UK and Canada.

Next higher operating profit combined with pre pandemic share repurchases delivered outstanding Q1, EPS of <unk> 79.

Compared with a loss of $3.65 last year and positive EPS at 33, 2 years ago, all on an adjusted basis and.

And finally, we achieved record first quarter digital revenue and profit as we continue to capitalize on the accelerated shift to online spending we sustained last years, 64% growth and added another 43% on top of that.

Other highlights include hitting our highest store traffic numbers compared to pre pandemic levels as the vaccine rollout increased shoppers confidence to return to physical stores.

Increase in gross margin up almost 500 basis points compared to last year as our merchandise Assortments and inventory management continue to fuel strong full price selling.

Leveraging SG&A significantly compared to pre pandemic levels at.

And achieving greater capital efficiency by managing inventories and capital spending effectively leading to a healthy balance sheet and solid cash position.

We were pleased that every business and every channel contributed to the beat versus expectations with of stores delivering the biggest gain.

We've always known our customers enjoy our differentiated store experience and the exceptional service they receive and person and it has been so exciting to see the strength of our brands draw enthusiastic shoppers back in as economies reopen.

It was however of the combination of the store and E Commerce results that led to the strength and the quarter.

Our online business from a strong foundation prior to COVID-19 generated double digit operating margins due to our focus on full price selling disciplined marketing spend and shipping and return policies to reinforce profitability.

Thanks to significant digital investments we've made over the past several years, we were able to handle the process. The record first quarter volumes and E. Commerce margin improved further as we leverage these investments with more scale over a wider base of revenue.

To advance our digital capabilities at an even faster pace, we announced we promoted parag desai to the newly created position of Chief strategy and digital officer.

And this new role Parag will drive greater synergies and continue to integrate systems and digital best practices across our E. Commerce portfolio, while also working with our divisions to deepen consumer insights and CRM capabilities.

Our digital investments have been generating strong results and we are confident pronged appointment will accelerate progress ensuring that we take advantage of the many omni channel opportunities the pandemic presented.

Congratulations frog.

Turning now to discuss each business and more detail beginning with journeys, which again led the way delivering record first quarter revenue and profit with 75% operating income growth versus pre pandemic levels.

There were several factors that shaped journeys exceptional Q1 performance starting with superb execution by our merchant team.

Pandemic is only magnified journeys industry, leading capabilities of anticipating identifying and securing the brands and styles most coveted by our team customers.

The combination of the right Assortments and effective consumer engagement drove strong demand and full price selling including later in the quarter. When we captured a healthy share of the increased consumer spending following the arrival of government stimulus checks and tax refunds.

In addition, journeys store team executed with excellence, achieving much higher conversion rates and increased transaction size capitalizing on improving store traffic to drive store revenue above pre pandemic levels.

On top of this journeys online team delivered e-commerce sales that more than doubled pre pandemic levels as new website visitors increased by almost 30% and generated close to 50% of Q1 online revenue.

With its incredibly strong vendor relationships the journeys team accomplished all of this while skillfully managing through the supply chain disruption, which persisted and the industry throughout the quarter.

Journeys offering of casual product resonated strongly with consumers as comfort continues to reign as the fashion choices of pandemic.

While <unk> always have a big compliment of fashion athletic footwear and their closets, we have talked about when fashion swings toward non athletic or casual footwear journeys is especially well positioned among its competition to deliver this assortment.

Moreover, current teen fashion trends are diverse and playing into a number of journeys brand strength.

While fashion athletic grew nicely year over year, the gains and casual outpaced this growth, including a strong start to the sandal season.

Congratulations journeys team on another record quarter as the destination for fashion footwear for teens.

Over and the UK Schuh delivered a commendable performance under very difficult circumstances.

Stores were opened for less than 20% of the possible operating days during the quarter due to government mandated lockdowns that began around Christmas and continued until after Easter.

Despite the substantial loss of store days revenue was in striking distance of Q1, 2 years ago, and operating income exceeded pre pandemic levels, including some onetime gains.

The schuh team lean successfully into its best in class digital capabilities throughout the pandemic to take advantage of the shift to online purchasing.

The first quarter was no exception as direct comps grew by more than 70% on top of last year's 90% growth and constituted more than 80% of shoes total revenue.

Prior to COVID-19, Schuh had the most advanced digital capabilities, among our retail businesses, which have only strengthened over the past year through enhanced CRM capabilities, including more robust prospecting.

Schuh implemented significant operational changes to facilitate this digital growth, including Reconfiguring, its DC and labor model to add more e-commerce packing station extending the deadline for next day delivery through new freight carrier arrangements and using stores as many dcs by rotating store.

Our fulfillment of ecommerce orders.

With fast tracking of the UK vaccine rollout restrictions started to lift and schuh definitely executed the formidable task of reopening stores and England in mid April.

Followed by the large majority of the UK stores at the end of the quarter.

With 7 of the top 10, best performing brands and common many of the trends driving shoes business were similar as usual to the ones driving journeys, but with more of a fashion athletic tilt.

Before moving on from Schuh I'd like to take a moment to congratulate the team on the official certification of its operations by carbon footprint limited as a carbon neutral organization.

It has for a long time and been a part of shoes DNA to operate and a socially responsible manner consistent with its purpose pillars and this accomplishment is the result of the team's efforts over several years.

This impressive achievement was realized ahead of schedule and provides a roadmap for our other businesses as we seek to reduce greenhouse gas emissions and work with our partners to reduce the carbon footprint of the products that we sell.

For Johnston <unk> Murphy, the first quarter marked another positive step forward and its recovery.

As vaccines rolled out consumers began the returned of life phase more quickly than expected gathering with family and friends and social outings and occasions.

And Q1 retail store traffic improved in each successive month digital sales grew and notable almost 20% attracting new customers to the brands and wholesale revenue increased.

Dana and his recovery plan is centered around new product technology, and innovation with 90% of new product development focused on expansion of its casual offering.

We were pleased that Q1 success was driven by high demand for newly developed casual styles led by the athletic inspired amhurst and activate collections and a new holistic marketing campaign in support of these launches.

At the same time, we saw continued gains and golf shoes and apparel. This spring further validating our success extending J and M beyond its dress shoe routes.

While sales lagged pre pandemic levels. We are encouraged by these trends and expect the recovery to accelerate once America begins at the return to office phase likely begin in earnest as we enter the summer and move into fall.

And yet another highlight licensed brands is now beginning to realize the benefits of the Levi's footwear licensed and <unk> acquisition that closed in January 2020, right as of the pandemic began.

Revenue more than doubled to record Q1 levels and operating profit improved considerably versus pre pandemic levels as Levi's footwear was well received and accounts ranging from department stores to journeys and journeys kids to family footwear.

This progress reinforces our excitement about the potential to create value by combining powerful brands with our fully integrated footwear sourcing capabilities.

Turning now to the current quarter, while Q2 is typically our lowest volume quarter as teens and consumers and general turn their attention to getting out of school and summer activities. The momentum from Q1 has continued into may.

While we expect government stimulus and pent up demand to add at some point, we expect journeys strength to continue schuh strength to build with the opening of stores and the U K economy, and Johnston <unk> Murphy's recovery to continue but it will likely take until back to work and the fall to propel another step function step.

Function improvement.

Vaccine rollout progress should benefit store traffic and the back half of the year and we expect that a good amount of the digital business that we captured during the pandemic will be sticky and anticipate a much higher e-commerce penetration as compared to fiscal 'twenty.

We're anticipating a more normalized back to school with a significant return to in person learning and a more normalized holiday.

Some COVID-19 effects will linger, but with higher savings and continued government aid the consumer is well positioned to spend.

While stimulus has been a positive the strength, we're seeing and our results goes well beyond this tailwind to the traction and momentum we're experiencing as a result of our strong portfolio of businesses and the strategic direction. We embraced a couple of years ago with our footwear focused strategy.

The pace of a recovery only reinforces our belief that the path we were on prior to the pandemic and now is the right path forward.

What we're most excited about as we see opportunities to solidify the digital gains we made and capitalize on the ongoing industry consolidation to further expand our market share.

COVID-19 has provided us a real opportunity to transform our business at a faster pace and our results demonstrate that's what we're accomplishing.

I'll now turn the call over to Tom.

Thanks, Mimi Q1 results far exceeded both of our expectations and last year across the board.

For comparison purposes, we believe that comparing to 2 years ago.

Our pre pandemic fiscal 'twenty provides the most meaningful.

Estimate of current performance as there is simply too much noise and fiscal 'twenty one's results for drawing and informative comparisons.

However, looking back at how our business has changed since fiscal 'twenty E. Commerce has become a larger percentage and our licensed brands segment has become a larger piece of the total as well.

Due to the acquisition of <unk> and strong Levi's sales.

These changes come with an overall lower gross margin rate due to the impact of direct shipping expense and expansion of our wholesale volume, which.

It should be more than offset with lower SG&A from these businesses.

Coupled with the impact of our cost reduction initiative, what sort of business normalizes post pandemic.

While these changes will reshape the P&L they have a positive impact on operating margins margins and an added benefit of a less capital intensive business model.

Turning back to Q1 and I'm pleased to report that the first quarter continued the sequential improvement of our operating results since the onset of the pandemic.

Higher revenue and excess of pre pandemic levels combined with SG&A that remains well managed led to significantly higher operating income versus fiscal 'twenty and Q1 adjusted earnings per share of <unk> 79.

Compared to 30, <unk> and fiscal 'twenty.

In terms of the specifics for the quarter consolidated revenue was $539 million up 9% compared with fiscal 'twenty, driven by continued strength and e-commerce up 144% versus fiscal 2000 and <unk>.

Combined with strong results from journeys and licensed brands compared to pre pandemic levels.

We did not provide overall or store comp results and Q1 is our policy removes and these stores.

That are closed for 7 consecutive days, either this year or last year.

And therefore, we feel that overall sales is the more meaningful metric.

Overall digital sales increased to 25% of our retail business.

Compared to 11% and fiscal 'twenty led.

Led by journeys penetration improvement choose ability to capture lost store sales online and Jane and double digit improvement compared to fiscal 'twenty.

Licensed brands revenue was up 122% versus fiscal 'twenty.

Consolidated gross margin was 47, 8% down 160 basis points from fiscal 'twenty as.

As we have experienced since the onset of the pandemic and crew.

Free shipping to fulfill direct sales pressure the gross margin rate and all of our businesses totaling 150 basis points of the overall decline driven mainly by shoes much higher level of digital sales due to store closures.

And our E comm puts pressure on our gross margin rate as I mentioned it comes with a lower cost structure and a high operating income rate.

Journeys gross margin increased 130 basis points, driven by lower markdowns and both stores and online.

<unk> gross margin decreased 1030 basis points due largely to the higher shifting expenses from the shift in channel mix since e-commerce accounted for so much issues revenue and the quarter.

Jane and gross margin decrease of 200 basis points was due to more closeouts at wholesale and higher markdowns at retail.

However, it was a sizable sequential improvement.

And finally, the combination of lower revenue at Jane and typically the highest gross margin rate of our businesses and the revenue growth of licensed brands typically our lowest gross margin rate negatively impacted the overall mix by 90 basis points.

Adjusted SG&A expense was 44, 3%.

A 340 basis point improvement compared to fiscal 'twenty as we leverage from higher revenue and ongoing actions around expense management.

The largest year over year savings came from occupancy costs driven by the UK government program, which provides property tax relief renovate rents and our ongoing rent savings on renewals.

The next largest areas of savings came from the reduction in stores selling salaries drip.

Driven by the effective use of workforce management tools to drive higher conversion and the face of wage pressure.

These savings were partially offset by incentive compensation, driven by improved profitability and increased marketing expenses needed to drive traffic to both stores and online.

Over the past many years of our organization has been intently focused on of critical effort to reduce occupancy costs.

Given the shift of traffic online and we continue to have even greater traction during the pandemic.

And Q1 this year, we negotiated 48 renewals and and <unk> and achieved a 29% reduction and cash rent or.

Or 27% on a straight line basis and North America.

This was on top of of 23% cash rent reduction or 22% on a straight line basis for 123 renewals last year.

These renewal renewals are for and even shorter term averaging approximately 2 years compared to the 3 year average we have seen in recent years.

With over 40% of our fleet coming up for renewal and the next 24 months.

This will remain a key priority for us going forward.

In summary, the first quarter's adjusted operating income was $18.8 million versus fiscal 'twenty 8.4 million.

Journeys schuh and licensed brands all achieved higher operating income.

Compared to fiscal 'twenty.

Our adjusted non-GAAP tax rate for the first quarter was 36%.

Reflecting the impact of foreign jurisdictions for which no income tax benefits were recorded.

Turning now to the balance sheet.

Q1, total inventory was down 18% compared to fiscal 'twenty on sales that were up 9% with all divisions showing improvement.

Our ending net cash position was $214 million.

And $32 million higher than the fourth quarter's level driven by strong cash generation from operations.

Capital expenditures were $12 million as.

As of our spend remains focused on digital and omni channel.

And depreciation and amortization was $11 million, we closed 17 stores and opened 1 during the first quarter.

Due to limited visibility in the business of the impacts of the pandemic, we will not be providing guidance for the second quarter of full fiscal 2020 to.

That said I do want to share some high level thoughts on how we are expecting the upcoming quarter to play out.

As I mentioned, we believe it is best to use the pre pandemic fiscal 'twenty as the reference point.

Q1 revenue benefited from stimulus and new Levi's business with headwinds from store closures at schuh, and while Jane and trend is improving.

At remained lower than fiscal 'twenty expenses.

<unk> expenses in Q1 benefited from renovations.

And some government relief programs selling salary dollars of lower in the quarter at Schuh stores were opened for less than 20% of the quarter.

As we transition into Q2 and.

And may we continue to feel the tailwind of stimulus, but expected to wane as we progressed through the quarter as.

As we enter back to school late in Q2, we assume that schools will return to in person learning. This fall with what should be a more normalized back to school selling season for journeys and schuh.

Around the same time, we expect more customers should begin returning to their offices.

And which should further benefit janie and this trend.

Now getting into more specifics of Q2, starting with revenue, we expect higher revenue compared to fiscal 'twenty levels.

This is mainly due to growth at journeys schuh stores coming back online and continued strength from the Levi's business.

Jane and trajectory is expected to improve but remain under fiscal <unk> level.

Directionally the overall sales increase for Q2 compared to fiscal 'twenty could.

It could be a little less than the 9% increase we experienced in Q1.

Our view does not contemplate additional store closures or restrictions from COVID-19 beyond what we know today.

Gross margin rates for Q2 will be below fiscal 'twenty levels, but better than the 160 basis point decline we experienced in Q1.

The sequential improvement is expected to come from better margin at Schuh, which will have a lower penetration of E com compared to Q1 <unk>.

Overall higher e-commerce penetration and the higher shipping costs that come with it continued to put pressure on our rate versus fiscal 'twenty.

Additionally, we anticipate the pressure from Jane and aim to continue into Q2 as well as the impact of of licensed brands growth on our business model as previously discussed.

We expect at the adjusted SG&A rate and Q2 will be in the ballpark of the right and fiscal 'twenty.

Sequentially, we will not see the large SG&A leverage we saw on Q1 as the benefits from renovations and some government relief programs will be less in Q1.

Compared to fiscal 'twenty higher revenue combined with our ongoing cost reduction initiatives will drive an improvement, but will be offset by higher performance based compensation.

As a reminder of.

Our EBITDA program pays for year over year improvement.

And we paid no incentive compensation last year, which will have an impact on every quarter this year and.

In summary, we expect operating income to be around breakeven for Q2, which is historically, our lowest volume quarter of the year, making it difficult to turn of large profit.

For taxes with operating income around breakeven in Q2, we expect and negligible tax expense.

The annual tax rate is expected to be approximately 32%.

In addition, thinking about the year.

We'd also like to note, we had a number of expense pickups like rent abatements and the back half of fiscal 'twenty..1 during the pandemic, we don't expect to repeat and the back half of this year.

Given the accelerated shift of our business from stores to digital and the impact from the pandemic.

We continue to make progress on reshaping our cost structure with rent expense as a critical component.

We have good experience, reducing our cost base.

During fiscal 19, and 20, we identified $43 million and expense savings and in addition, following the.

The divestiture of lids, we eliminated the $9 million of stranded costs associated with that business.

More recently and fiscal 'twenty, 1 during the pandemic, we reduced our adjusted SG&A expenses by over 15%.

While a good amount of this was temporary.

There are also significant permanent dollar savings.

This has become a core competency of genesco.

As a reminder, our initial target for this year is to identify savings and operating expenses.

Of $25 million to $30 million or approximately 3% of.

On an annualized basis.

These savings are coming from reduced occupancy cost and selling salaries.

And lower transportation and marketing costs from our procurement initiatives already underway.

These savings are before investing and the variable expenses necessary for our increased digital sales as.

And as well as minimum wage and other new cost pressures and increased.

And inflation, but time will tell whether is temporary or permanent.

We have made significant process on the targeted savings and we will continue to provide updates as the year unfolds.

This cost saving initiative is 1 part of a multi pronged strategy to transform our business all designed to reflect a more capital efficient model.

Combined with lower capital expenditures on stores fewer lease obligations and efficient use of inventory. It will drive further improvements and return on invested capital and allow for improved flexibility and our operating model.

In conclusion, I would like to thank all of our employees for such an incredible start to our new fiscal year. The team has much to be proud of and remains aligned on delivering on our footwear focused strategy. At this time I would like to turn the call back over to Mimi. So she can discuss our strategy.

Thanks, Tom as I said, the footwear focused strategy, we embarked on a couple of years ago is the right strategy for our business and the foundation of our strong performance.

Let me briefly revisit the rationale behind this strategy and how it continues to drive results.

Across our company, we aspire to create and curate leading footwear brands that represent style innovation and self expression to be the destination for our consumers favorite fashion footwear.

Our strong strategic positioning and our specialty consumer markets, we serve close connections with our customers and enduring leadership positions are what make each of our footwear businesses distinctive on their own and of synergies they share make them stronger together.

We are best known for our retail platform, but we have and important and valuable side of our business that successfully owns and licenses brands, giving us another good platform for future growth.

Our opportunity to unlock the full potential of genesco is to accelerate the digital and omnichannel potential and our retail businesses and to meaningfully grow our branded side.

We operate in and industry undergoing substantial change with the continued consumer adoption of digital commerce positioning our company to affect transformational change.

We made substantial progress on this and fiscal 'twenty and the pandemic. Despite its challenges was an accelerant to this change.

Looking at the retail side of our business journeys understanding of teens and unrivaled access to merchandise. They want equipped journeys uniquely well to serve this single customer and to navigate the shifts that are and advantageous and inherent part of fashion footwear in this market segment.

Shoe occupies and essentially identical position in the U K.

Both brands have exceptional merchandising abilities and of passionate focus on customer service.

And both serve as key Omnichannel distribution partners for the current most relevant youth footwear brands.

Given that they enjoy significant overlap and their vendor basis. Their combined scale allows for stronger brand relationships underscored by activities like joint top to top global summit and shared special makeup product collections sold exclusively at journeys and schuh.

Vendor scale, along with product and consumer insights provide great synergies as debt strategic and operational initiatives sharing of.

A strong example of this issue entering into the kids business announced substantial profitable and growing part of schuh by borrowing and leveraging journeys knowhow and success.

The anchor of the branded side of our company as Johnston and Murphy, whose leadership position is founded on brand equity that has taken 170 years to build.

This heritage ability to interpret and shape its customers' evolving fashion needs through time and established omni channel expertise provide a strong foundation for a recovery from the pandemic.

As a complement to brands we own licensed brands allows us to leverage our footwear capabilities and expertise across other well known brands with strong brand equity and opens additional tiers of distribution.

Our branded businesses benefit from common wholesale trade relationships and product trend inspiration exchange and in addition, the global sourcing platform spanning across JM and licensed brands provide some of the most meaningful benefits.

For example, licensed brands designs develops and sources product accounting for 1 third of the casual footwear sold and Jay and M factory outlets, including the top selling style overall.

Our branded platform is genesco is most promising platform for future growth.

This platform allows for leveraging of our robust direct to consumer capabilities complemented by well developed wholesale channel relationships, giving us the opportunity.

To add additional footwear brands that can plug into this infrastructure and capitalize on today's retail landscape, where brands increasingly go direct to consumer.

Licensed is plugged into this infrastructure also add value evidenced by the success, we're having with Levi's and the enhanced capabilities <unk> added to our footwear sourcing platform.

In addition, not only do we benefit from our North America and shared services platform and areas like technology logistics finance and HR that size and scale matter, even more and are now technology and digitally driven retail sector as the investments to keep pace with consumer expectations.

And you to grow.

While journeys and Johnston and Murphy go to market as separate and distinctive brands they share almost all of their retail systems and services, providing significant cost sharing and enhanced benefits.

And from point of sales software to merchandising systems to loss prevention and real estate, the retail technology and infrastructures of these 2 concepts are largely integrated.

For example, the point of sales software upgrade we're rolling out this year will serve both journeys and Jay and EM.

Likewise, the wholesale technology infrastructures of <unk> and licensed brands are significantly integrated as well.

And if we look to the remainder of fiscal 'twenty 2 and beyond.

Further leveraging these synergies within and across platforms is an important step and delivering increased value on top of the 6 strategic growth pillars, driving our footwear focused strategy.

These 6 pillars put in place prior to the pandemic emphasize continued investment in our digital and omni channel capabilities deepening our consumer insights driving product innovation and reshaping our cost base.

On future calls like the last 1 I will provide an update on the significant progress we're making on these 6 pillars and corresponding strategic initiatives, which are having real impact of driving growth and profits for genesco.

Now to conclude my genuine thanks goes out to all our people from your diligent efforts to deliver absolutely exceptional first quarter results.

Not only of we've taken care of our customers and each other during the pandemic, but we began the year on a firm foundation that allowed us to grow and create tremendous value and our company.

In addition over the last several months we've added 4 very qualified and experienced directors to our board, whose perspectives will be invaluable as we shape our future.

Genesco is on the right path our strategy is working our future is bright and I have never been more excited about the people and potential and our business.

This concludes our prepared remarks, and I'll now turn the call back over to the operator for Q&A.

Thank you.

At this time, we'll be conducting a question and answer session and you can.

Wanted to ask a question. Please press star 1 on your telephone keypad and of confirmation tone will indicate your line is and the question queue.

And first start 2 of you relate to remove your question from the queue.

And for physicians that are using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

1 moment, please while we poll for questions and I was kind of star 1.

Okay.

Thank you.

Our first question is from the line of Steve Marotta with C. L. King. Please proceed with your question.

Good morning, Mimi and Tom Congratulations on capitalizing on the tailwind and the first quarter very nicely done on.

Thank you and a little bit about your inventory position versus 2 years ago, considering that at below 2 years ago and the pace of sales are as good as they are I'm, assuming you're in chase mode can you talk a little bit about when you would expect a little bit more equilibrium between.

And what your inventories are and what you expect demand to be.

Sure So Dave definitely the supply chain situation has been challenging it's not just the ports, but transportation from ports containers.

And disruption has.

It really started with COVID-19 and the supply chain and havent been ready for that consumption to pick up so robustly.

It's not a new problem, we have been managing throughout the pandemic with this situation.

And our last quarter that we just had we had some of these issues as well basically what happened is that whatever inventory came in went right back out.

There was a worst GAAP to fiscal 'twenty at the beginning of the quarter yet sales were strong. So we again have been managing through this so the good news is things have been getting better at the ports and and the supply chain.

A very important partner to our brands they've worked with US a lot to date and this is a lower volume time for us at gives us a bit of time to catch up.

And do expect to do a good amount of catching up and the second quarter, which will help with back to school and we expect to be in good shape by the end of the third quarter and time for holiday based on what we know today.

That's really helpful and I did want to touch a little bit on back to school and holiday overall as well considering that it looks like.

Even summer camps and by that I mean immediate term are a little bit more normalized to that and as far as all indications are from.

And in person classes at elementary Middle and high schools as well as colleges and will be occurring in the back to school season.

And how abnormal obviously last year was you could dream of a little of dream about how strong back to school could be and then obviously dovetail a little bit into holiday assuming that.

Oh, sorry.

Much optimism internally there is there might be here and my and my commentary can you talk a little bit about how you would approach of holiday season in order to maximize sales and market share. Thanks.

Yeah sure. So look there are a lot of great pluses out their GDP growth is good and theres been a huge injection of cash and to the economy and a lot of savings and plants, increasing COVID-19 cases had been rapidly declining and you can just feel that people are excited to get back to normal and you just feel of that.

And at that America is coming back to life back to school should be more normal this year than last year and it was completely and not normal at last year.

And we gathered a lot of data about back to school, we estimated about 2 thirds of students attend at only virtually.

Back to school for US starts in late July we do of significant business in August and then it trails off in September.

So we are really watching to see what the school districts are saying all of school districts, if not decided definitively what theyre going to do next year, but there's a big push to get back in person and so we think that that is going to be of positive for our business. We also think that there are nice underlying drivers like the.

Enhancements to the child tax credit and that's going to start and the middle of July. So if people are going to get payments directly into their accounts.

And this timing coincides nicely with back to school. It is going to continue through right up until holidays. So it may help with gift, giving as well and so look we.

And we see lots of great science, and our business, we see lots of great signs of the economy. There was a tremendous amount of disruption last year. So the consumer patterns are different and so we are taking all of that into accounts and.

And are optimistic that know that and if there's a lot to come and the back part of the year.

Very helpful I'll take the balance off line. Thanks.

Thank you.

Next question's from the line of Jonathan Komp with Baird. Please proceed with your questions.

Yes, hi, Thank you first I wanted to ask on journeys, maybe separate of consumer demand of our ability and willingness to spend.

How are you thinking about positioning and the assortment just looking at how strong journeys is bad and add any commentary the balance of the seasonal summer season here and then how you are positioning the assortment.

Back to school and fall winter.

Sure.

So first of all I, just want to give a shout out to our merchants they place the right bets on the right product. They have so much experience just navigating the twists and turns of the teen market end and clearly the twists and turns of the pandemic at what we have been seeing and this latest fashion cycle and John you know we spent a lot of time.

Talking with you about the retro athletic cycle, which was the cycle right before we went into the pandemic and we started to see last year that there was a real shift into what we call more casual product I talked about it on on the call. We saw casual in terms of sandals and.

In terms of.

Boots, we saw the propensity of that consumer.

Shift away from fashion athletic, which they all of those are consuming into a more more casual assortment.

And what this is a real positive for our journeys business because we are uniquely positioned.

To serve the customer in the casual assortment. What's interesting right. Now is that teams are finding inspiration for whatever they are wearing and just reinterpretations of throwback style. So $19.80.1990 of the.

The 2000, and fashions and Theres, a lot of diversity and fashions and and styles right now kick talks videos and other social media team.

<unk> lot of show their individual style and that is just playing nicely into the assortment, we have their borrowing bits and pieces.

And what they are seeing and this is translating into adjusts such creativity and such wonderful displays of of.

Our fashion and so we expect that's going to continue through back to school and back into into holiday and casual has grown as a percentage of our business every quarter last year and also in Q1.

Okay. That's really helpful. And then 1 on just the licensed business can you give a little more detail on what's driving the levi's.

And then.

When you look at the licensed portfolio combined currently how do you think about the opportunity for the brands that you have currently.

Sure.

We have.

And traditionally in our licensed brands business, we at than a double digit operating margin with really good return on invested capital.

And we knew that we needed to add a licensed as the consumer appeal of some of the licenses that we had and our portfolio had been waning and sales had been shrinking not enough to support our infrastructure and we've been searching for the right opportunity for some time and so levis clearly just at an incredible iconic brand name with.

Tremendous amount of heritage with the right opportunity for US. This <unk> acquisition added to our overall sourcing capabilities, we were able to get some infrastructure to add onto the infrastructure that we have right now that allows us to hit some different price point.

And and allows us to.

Hits on.

And styling that we couldn't otherwise hit and so we like what we're seeing so far the pandemic delayed our ability to capitalize on this investment, but the first quarter and the strength of the sales and the bottom line I think show where the opportunity is and we acquired a few other licenses and I think the infrastructure exists.

Rest of plug additional licenses into and so on ask Tom if he would add anything John on opportunities on I would say we're excited about this opportunity is a good driver of return on invested capital of so very asset light model and the arrangement. We have with <unk> provides a lot of capabilities from a sourcing point of view.

So we're doing well with that business, we've got a strong order book and we really like how thats progressing.

Great just 1 more Tom if I could thinking about first half performance here.

Back out some of the onetime benefits you highlighted it looks like operating margin still trailing fiscal 2020, and the first half so.

How should we think about maybe at the full year of getting back to about 4 and 5% operating margin level you had for the full year of fiscal 'twenty, and then and there.

And then growing from there.

Yeah, So John.

I think that we are clearly not out of the pandemic and there are a couple of our businesses Johnson and Murphy and Schuh in particular that would not have been operating at full strength during the first quarter and so when you think about at Schuh stores were opened for only 20% of their time and yet in spite of that the strength of digi.

<unk> was so good that we almost met fiscal 'twenty sales level. So you can imagine that there is just more to come with the opening of stores and continued strength of the digital business and then Johnson Murphy, we've talked also about the fact that.

Of that consumer went into hibernation and so we were very pleased to see how much debt business grew and strengthened over the course of the first quarter, it's going to take a little bit of time. So I think that that is largely some of the of.

The drivers there.

That gives us opportunity going forward and Fortunately journeys of strength of journeys and licensed brands were able to.

Even overcome.

The.

And the time that we need for those businesses to recover and deliver a very strong first quarter performance and so I'll add to Oh.

I'll ask Tom to add to that.

Yes, I think I don't have.

Much more to add to that that's of great. Great summary of what the opportunity we see going forward.

And you don't continue to improve our operating margins.

We talked about the licensed brands business. There is further opportunity to improve the digital penetration with with journeys and we like where.

The competitive positions, both journeys and schuh have and their marketplaces, we see further opportunity to improve the margins at at.

And at Schuh, and Johnston <unk> Murphy I think we've got the right team in place here to be able to recover from the pandemic and we've got some good items at Johnston <unk> Murphy that are getting a lot of traction and they are selling well. So we like the opportunity and the ability to ever Johnston <unk> Murphy business recover and keep in mind.

Branded business, we have better margins and we already have the omni channel.

Distribution strategy put in place. So we see a lot lot lot of <unk> and place for us to be able to start improving our operating margins and I think that to have imagined we could be back to the pre pandemic operating margin levels and quickly and something that is certainly within our line of <unk>.

More so because of how quickly the economy has opened up.

I think when you think about our overall formula for profitability.

On the call about a great opportunity for growth and our digital business, which has healthy double digit operating margin and.

And a chance to get even better with size and scale the opportunity to reshape our cost structure and our store channel. We had signed up for rents that were outsized given the shift to online and the pandemic disruption to retail along with a significant number of our leases coming up for renewal accounts.

Talked about 40% of our leases coming up for renewal has given us a chance to reduce rents even faster, which is the most important part of reshaping our cost structure and so when you think about our ability to get to pre pandemic levels and perhaps beyond those of the real drivers and the bottom line is that we mostly.

Believe that that opportunity exists because of the competitive strength of our businesses that we've discussed.

It's all very helpful. Thank you very much.

Thank you.

And we at this time, we've reached the end of the question and answer session and I'll now turn the call over to Amy Hall on for closing remarks, great. Thank you everybody for joining us today and we hope you have a great holiday weekend. Thank you.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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Good day, everyone and welcome to the Genesco first quarter of fiscal 2022 Conference call. Just a reminder, today's call is being recorded I will now.

I'll turn the call over to Dave Slater, Vice President of P&A and Investor Relations. Please go ahead Sir.

Good morning, everyone and thank you for joining us to discuss our first quarter of fiscal 2022 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.

Participants also expect to refer to certain adjusted financial measures during the call.

All non-GAAP financial measures referred to and prepared remarks are reconciled to their GAAP counterparts, and the attachments to this morning's press release and and schedules are available on the company's homepage under Investor Relations and the quarterly earnings section.

And 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, our board Chair, President and Chief Executive Officer, who will begin our prepared remarks with highlights from the first quarter.

And Tom George Our Chief Financial Officer, who will review Q1 results in more detail and provide direction for Q2.

Now I would like to turn it over to Mimi.

Thanks, Dave Good morning, everyone and thank you for joining us today.

Our company began fiscal 'twenty, 2 with positive momentum following and incredibly challenging year battling the pandemic.

And each successive quarter of our people worked with great tenacity and success to improve top and bottom line results to close the gap to pre pandemic levels drive the recovery and return to profitable growth.

We entered the pandemic year from a position of strength following 11 consecutive quarters of comp sales growth and our footwear businesses.

And thanks to the ingenuity and efforts of our people, we exited last year with a solid foundation to build upon.

As a result fiscal 'twenty 2 is off to an incredibly strong start with of first quarter that meaningfully exceeded our expectations.

Our outperformance was driven by better than anticipated results at every division led by record first quarter revenue and profitability at journeys.

And then anticipated.

I'd like to begin today by outlining some of the key highlights from the quarter.

<unk>, primarily in the UK and Canada.

Next higher operating profit combined with pre pandemic share repurchases delivered outstanding Q1, EPS of <unk> 79.

Compared with a loss of $3.65 last year and positive EPS at 33, 2 years ago, all on an adjusted basis.

Other highlights include hitting our highest store traffic numbers compared to pre pandemic levels as the vaccine rollout increased shoppers confidence to return to physical stores.

Increase in gross margin up almost 500 basis points compared to last year as our merchandise Assortments and inventory management continue to fuel strong full price selling.

Leveraging SG&A significantly compared to pre pandemic levels at.

And achieving greater capital efficiency by managing inventories and capital spending effectively leading to a healthy balance sheet and solid cash position.

We were pleased that every business and every channel contributed to the beat versus expectations with of stores delivering the biggest gain.

It was however of the combination of the store and E Commerce results that led to the strength and the quarter.

To advance our digital capabilities at an even faster pace, we announced we promoted parag desai to the newly created position of Chief strategy and digital officer.

In this new role Parag will drive greater synergies and continue to integrate systems and digital best practices across our E. Commerce portfolio, while also working with our divisions to deepen consumer insights and CRM capabilities.

Congratulations frog.

There were several factors that shaped journeys exceptional Q1 performance starting with superb execution by our merchant team at.

And the pandemic has only magnified journeys industry, leading capabilities of anticipating identifying and securing the brands and styles most coveted by our team customers.

With its incredibly strong vendor relationships at journeys team accomplished all of this while skillfully managing through the supply chain disruption, which persisted and the industry throughout the quarter.

Journeys offering of casual product resonated strongly with consumers as comfort continues to reign as the fashion choices of pandemic.

And as always have a big compliment of fashion athletic footwear and their closets, we have talked about when fashion swings toward non athletic or casual footwear journeys is especially well positioned among its competition to deliver this assortment.

Moreover, current teen fashion trends are diverse and playing into a number of journeys brand strength.

And while fashion athletic grew nicely year over year, the gains and casual outpaced this growth, including a strong start to the sandal season, congratulations journeys team on another record quarter as the destination for fashion footwear for teens.

Over and the UK Schuh delivered a commendable performance under very difficult circumstances.

Stores were opened for less than 20% of the possible operating days during the quarter due to government mandated lockdowns that began around Christmas and continued until after Easter.

Despite the substantial loss of store days revenue was in striking distance of Q1, 2 years ago, and operating income exceeded pre pandemic levels, including some 1 time gains.

And this schuh team lean successfully into its best in class digital capabilities throughout the pandemic to take advantage of the shift to online purchasing that.

The first quarter was no exception as direct comps grew by more than 70% on top of last year's 90% growth and constituted more than 80% of shoes total revenue.

Schuh implemented significant operational changes to facilitate this digital growth, including Reconfiguring SDC and labor model to add more e-commerce packing station extending the deadline for next day delivery through new freight carrier arrangements and using stores as many dcs by rotating store.

Fulfillment of ecommerce orders.

With fast tracking of the UK vaccine rollout restrictions started to lift and schuh definitely executed the formidable task of reopening stores and England in mid April.

Followed by the large majority of the UK stores at the end of the quarter.

And with 7 of the top 10, best performing brands and common and many of the trends driving shoes business were similar as usual to the ones driving journeys, but with more of a fashion athletic tilt.

Before moving on from Schuh I'd like to take a moment to congratulate the team on the official certification of its operations by carbon footprint limited as a carbon neutral organization.

It has for a long time debt of part of <unk> DNA to operate and a socially responsible manner consistent with its purpose pillars and this accomplishment is the result of the team's efforts over several years.

For Johnston <unk> Murphy, the first quarter marked another positive step forward and its recovery.

As vaccines rolled out consumers began the returned of life phase more quickly than expected gathering with family and friends and social outings and occasions.

And Q1 retail store traffic improved in each successive month digital sales grew of notable almost 20% attracting new customers to the brands and wholesale revenue increased.

Dana on the recovery plan is centered around new product technology, and innovation with 90% of new product development focused on expansion of its casual offering.

At the same time, we saw continued gains and golf shoes and apparel. This spring further validating our success extending J and M beyond its dress shoe routes.

While sales lagged pre pandemic levels. We are encouraged by these trends and expect the recovery to accelerate once America begins the return to office space likely begin in earnest as we enter the summer and move into fall.

And yet another highlight licensed brands is now beginning to realize the benefits of the Levi's footwear licensed and tow gas acquisition that closed in January 2020, right as of the pandemic began.

Revenue more than doubled to a record Q1 levels and operating profit improved considerably versus pre pandemic levels as Levi's footwear was well received and accounts ranging from department stores to journeys and journeys kids to family footwear.

This progress reinforces our excitement about the potential to create value by combining powerful brands with our fully integrated footwear sourcing capabilities.

Function improvement.

We're anticipating a more normalized back to school with a significant return to in person learning and a more normalized holiday.

Some COVID-19 effects will linger, but with higher savings and continued government aid the consumer is well positioned to spend.

While stimulus that's been a positive the strength, we're seeing and our results goes well beyond this tailwind to the traction and momentum we are experiencing as a result of our strong portfolio of businesses and the strategic direction. We embraced a couple of years ago with our footwear focused strategy.

The pace of our recovery only reinforces our belief that the path we were on prior to the pandemic and now is the right path forward.

What we're most excited about as we see opportunities to solidify the digital gains we made and capitalize on the ongoing industry consolidation to further expand our market share.

COVID-19 has provided us the real opportunity to transform our business at a faster pace and our results demonstrate that's what we're accomplishing.

I'll now turn the call over to Tom.

Thanks, Mimi Q1 results far exceeded both of our expectations and last year across the board.

For comparison purposes, we believe that comparing to 2 years ago.

Our pre pandemic fiscal 'twenty provides the most meaningful assessment of current performance as there is simply too much noise and fiscal 'twenty one's results for drawing informative comparisons.

However, looking back at how our business has changed since fiscal 'twenty E. Commerce has become a larger percentage and our licensed brands segment has become a larger piece of the total as well.

Due to the acquisition of <unk> and strong Levi's sales.

These changes come with an overall lower gross margin rate due to the impact of direct shipping expense and the expansion of our wholesale volume.

It should be more than offset with lower SG&A from these businesses.

Coupled with the impact of our cost reduction initiative once our business normalizes post pandemic.

While these changes will reshape the P&L they have a positive impact on operating margins margins and an added benefit of a less capital intensive business model.

Turning back to Q1 and I'm pleased to report that the first quarter continued the sequential improvement of our operating results since the onset of the pandemic.

Compared to 33 and fiscal 'twenty.

In terms of the specifics for the quarter consolidated revenue was $539 million up 9% compared to fiscal 'twenty, driven by continued strength and e-commerce up 144% versus fiscal 'twenty can.

Combined with strong results from journeys and licensed brands compared to pre pandemic levels.

We did not provide overall or store comp results and Q1 is our comp policy removes and these stores.

That are closed for 7 consecutive days, either this year or last year and.

And therefore, we feel that overall sales is a more meaningful metric.

Overall digital sales increased to 25% of our retail business.

Compared to 11% and fiscal 'twenty led.

Led by journeys penetration improvement choose ability to capture lost store sales online and Jane and double digit improvement compared to fiscal 'twenty.

Licensed brands revenue was up 122% versus fiscal 'twenty.

Consolidated gross margin was 47, 8% down 160 basis points from fiscal 'twenty as.

And as we've experienced since the onset of the pandemic increased shipping to fulfill direct sales pressure the gross margin rate and all of our businesses totaling 150 basis points of the overall decline driven mainly by schuh is much higher level of digital sales due to store closures while E com.

And puts pressure on our gross margin rate as I mentioned it comes with a lower cost structure and a high operating income rate.

Journeys gross margin increased 130 basis points, driven by lower markdowns and both stores and online.

<unk> gross margin decreased 1030 basis points due largely to the higher shipping expense from the shift in channel mix since e-commerce accounted for so much issues revenue and the quarter.

Jane and gross margin decrease of 200 basis points was due to more closeouts at wholesale and higher markdowns at retail.

However, it was a sizable sequential improvement.

Finally, the combination of lower revenue at Jane and typically the highest gross margin rate of our businesses and the revenue growth of licensed brands typically our lowest gross margin rate negatively impacted the overall mix by 90 basis points.

Adjusted SG&A expense was 44, 3%.

340 basis point improvement compared to fiscal 'twenty, as we leverage from higher revenue and ongoing actions around expense management.

The largest year over year savings came from occupancy costs driven by the UK government program, which provides property tax relief renovate rents and our ongoing rent savings on renewals and <unk>.

Next largest areas of savings came from the reduction in stores selling salaries driven.

Driven by the effective use of workforce management tools to drive higher conversion and the face of wage pressure.

These savings were partially offset by incentive compensation, driven by improved profitability and increased marketing expenses needed to drive traffic to both stores and online.

Over the past many years, our organization has been intently focused on of critical effort to reduce occupancy costs.

Given the shift of traffic online and we continue to have even greater traction during the pandemic.

And Q1 this year, we negotiated 48 renewals and and <unk> and achieved a 29% reduction and cash rent.

Or 27% on a straight line basis and North America.

This was on top of of 23% cash rent reduction or 22% on a straight line basis for 123 renewals last year.

These renewal renewals are for and even shorter term averaging approximately 2 years compared to the 3 year average we have seen in recent years.

With over 40% of our fleet coming up for renewal and the next 24 months.

This will remain a key priority for us going forward.

In summary, the first quarter's adjusted operating income was $18.8 million versus fiscal 'twenty $8.4 million.

Journeys schuh and licensed brands, all achieved higher operating income compared to fiscal 'twenty.

Our adjusted non-GAAP tax rate for the first quarter was 36%.

Reflecting the impact of foreign jurisdictions for which no income tax benefits were recorded.

Turning now to the balance sheet.

Q1, total inventory was down 18% compared to fiscal 'twenty on sales that were up 9% with all divisions showing improvement.

Our ending net cash position was $214 million.

$32 million higher than the fourth quarter's level driven by strong cash generation from operations.

Capital expenditures were $12 million is.

As of our spend remains focused on digital and omni channel.

And depreciation and amortization was $11 million, we closed 17 stores and opened 1 during the first quarter.

Due to limited visibility and the business of the impact of the pandemic, we will not be providing guidance for the second quarter of full fiscal 2022 that said I do want to share some high level thoughts on how we are expecting the upcoming quarter to play out.

As I mentioned, we believe it is best to use the pre pandemic fiscal 'twenty as the reference point.

Q1 revenue benefited from stimulus and new Levi's business with headwinds from store closures at schuh, and while Jan and <unk> trend is improving.

At remained lower than fiscal 'twenty.

<unk> and Q1 benefited from rent abatements.

And some government relief programs selling salary dollars of lower in the quarter at Schuh stores were opened for less than 20% of the quarter.

As we transition into Q2 and.

And may we continue to feel the tailwind of stimulus, but expected to wane as we progressed through the quarter as.

As we enter back to school late in Q2, we assume that schools will return to in person learning. This fall with what should be a more normalized back to school selling season for journeys and schuh.

Around the same time, we expect more customers should begin returning to their offices.

Which should further benefit <unk> trend.

Now getting into more specifics of Q2, starting with revenue, we expect higher revenue compared to fiscal 'twenty levels.

This is mainly due to growth at journeys schuh stores coming back online and continued strength from the Levi's business.

Jane and trajectory is expected to improve but remain under fiscal 'twenty is level <unk>.

Directionally the overall sales increase for Q2 compared to fiscal 'twenty could.

It could be a little less than the 9% increase we experienced in Q1.

Our view does not contemplate additional store closures or restrictions from COVID-19 beyond what we know today.

Gross margin rates for Q2 will be below fiscal 'twenty levels, but better than the 160 basis point decline we experienced in Q1.

The sequential improvement is expected to come from better margin at Schuh, which will have a lower penetration of E com compared to Q1.

Overall higher e-commerce penetration and the higher shipping costs that come with it continued to put pressure on our rate versus fiscal 'twenty dish.

Additionally, we anticipate the pressure from JM to continue into Q2 as well as the impact of licensed brands growth on our business model as previously discussed.

And we expect at the adjusted SG&A rate and Q2 will be in the ballpark of the right and fiscal 'twenty sequentially.

Sequentially, we will not see the large SG&A leverage we saw on Q1 as the benefits from renovations and some government relief programs will be less in Q1.

Impaired to fiscal 'twenty higher revenue combined with our ongoing cost reduction initiatives will drive an improvement, but will be offset by higher performance based compensation.

As a reminder.

Our EBITDA program pays for year over year improvement and we paid no incentive compensation last year, which will have an impact on every quarter this year and.

In summary, we expect operating income to be around breakeven for Q2, which is historically, our lowest volume quarter of the year, making it difficult to turn of large profit.

For taxes with operating income around breakeven in Q2, we expect and negligible tax expense.

The annual tax rate is expected to be approximately 32%.

In addition, thinking about the year.

We'd also like to note, we had a number of expense pickups like rent abatements and the back half of fiscal 'twenty..1 during the pandemic, we don't expect to repeat and the back half of this year.

Given the accelerated shift of our business from stores to digital and the impact from the pandemic.

We continue to make progress on reshaping our cost structure with rent expense as a critical component.

We have good experience, reducing our cost base.

During fiscal 19, and 20, we identified $43 million and expense savings and in addition, following the.

And the divestiture of lids, we eliminated the $9 million of stranded costs associated with that business.

More recently and fiscal 'twenty, 1 during the pandemic, we reduced our adjusted SG&A expense by over 15%.

While a good amount of this was temporary and.

There are also significant permanent dollar savings.

This has become a core competency of genesco.

As a reminder, our initial target for this year is to identify savings and operating expenses.

Of $25 million to $30 million or approximately 3%.

And on an annualized basis.

These savings are coming from reduced occupancy costs and selling salaries.

And lower transportation and marketing costs from our procurement initiatives already underway.

These savings are before investing and the variable expenses necessary for our increased digital sales as.

And as well as minimum wage and other new cost pressures.

And increased inflation and the time will tell whether it's temporary or permanent.

We have made significant process on the targeted savings and we will continue to provide updates as the year unfolds.

This cost savings initiative is 1 part of a multi pronged strategy to transform our business all designed to reflect a more capital efficient model.

Combined with lower capital expenditures on stores fewer lease obligations and efficient use of inventory.

It will drive further improvements and return on invested capital and allow for improved flexibility and our operating model.

Thanks, Tom as I said, the footwear focused strategy, we embarked on a couple of years ago is the right strategy for our business and the foundation of our strong performance.

Let me briefly revisit the rationale behind this strategy and how it continues to drive results.

Across our company, we aspire to create and curate leading footwear brands that represent style innovation and self expression.

To be the destination for our consumers favorite fashion footwear.

We are best known for our retail platform, but we have and important and valuable side of our business that successfully owns and licenses brands, giving us another good platform for future growth.

Our opportunity to unlock the full potential of genesco is to accelerate the digital and omnichannel potential and our retail businesses and to meaningfully grow our branded side.

We operate in and industry undergoing substantial change with the continued consumer adoption of digital commerce positioning our company to affect transformational change.

We made substantial progress on this and fiscal 'twenty and the pandemic. Despite its challenges was an accelerant to this change.

Looking at the retail side of our business journeys understanding of teens and unrivaled access to merchandise they want equips journeys uniquely well to serve this single customer and to navigate the shifts that are and advantageous and inherent part of fashion footwear in this market segment.

She will occupies and essentially identical position in the U K.

Both brands have exceptional merchandising abilities and of passionate focus on customer service.

Both serve as key omni channel distribution partners for the current most relevant use footwear brands.

Given that they enjoy significant overlap and their vendor basis. Their combined scale allows for stronger brand relationships underscored by activities like joint top to top global summits and shared special makeup product collections sold exclusively at journeys and schuh.

Vendor scale, along with product and consumer insights provide great synergies as does strategic and operational initiatives sharing.

A strong example of this issue entering into the kids business announced substantial profitable and growing part of schuh by borrowing and leveraging journeys knowhow and success.

The anchor of the branded side of our company as Johnston and Murphy, whose leadership position is founded on brand equity that has taken 170 years to build.

This heritage ability to interpret and shape its customers' evolving fashion needs through time and established omni channel expertise provide a strong foundation for a recovery from the pandemic.

For example, licensed brands designs develops and sources product accounting for 1 third of the casual footwear sold in Jan and factory outlets, including the top selling style overall.

Our branded platform is genesco is most promising platform for future growth.

This platform allows for leveraging of our robust direct to consumer capabilities complemented by well developed wholesale channel relationships, giving us the opportunity.

To add additional footwear brands that can plug into this infrastructure and capitalize on today's retail landscape, where brands increasingly go direct to consumer.

Licensed is plugged into this infrastructure also add value evidenced by the success, we're having with Levi's and the enhanced capabilities <unk> added to our footwear sourcing platform.

In addition, not only do we benefit from a north American shared services platform and areas like technology logistics finance and HR that size and scale matter, even more and are now technology and digitally driven retail sector as the investments to keep pace with consumer expectations.

<unk> to grow.

While journeys and Johnston and Murphy go to market as separate and distinctive brands. They share almost all of their retail systems and services, providing significant cost sharing and enhanced benefits for.

From point of sales software to merchandising systems to loss prevention and real estate, the retail technology and infrastructures of these 2 concepts are largely integrated.

For example of the point of sales software upgrade we're rolling out this year will serve both journeys and Jay and EM.

Likewise, the wholesale technology infrastructures of JM and licensed brands are significantly integrated as well.

And if we look to the remainder of fiscal 'twenty, 2 and beyond further leveraging these synergies within and across platforms is an important step and delivering increased value on top of the 6 strategic growth pillars, driving our footwear focused strategy.

These 6 pillars put in place prior to the pandemic emphasize continued investment and our digital and omni channel capabilities deepening our consumer insights driving product innovation and reshaping our cost base.

Now to conclude my genuine thanks goes out to all our people for their diligent efforts to deliver absolutely exceptional first quarter results.

Not only of we've taken care of our customers and each other during the pandemic, but we began the year on a firm foundation that allowed us to grow and create tremendous value and our company.

In addition over the last several months we've added 4 very qualified and experienced directors to our board, whose perspectives will be invaluable as we shape our future.

Genesco is on the right path our strategy is working our future is bright and I have never been more excited about the people and potential and our business.

This concludes our prepared remarks, and I'll now turn the call back over to the operator for Q&A.

Thank you.

At this time, we'll be conducting a question and answer session if at all.

Moving to ask a question. Please press star 1 on your telephone keypad and of confirmation tone will indicate your line is and the question queue.

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1 moment, please while we poll for questions and I was kind of Starwood.

Yeah.

Thank you.

Our first question is from the line of Steve Marotta with C. L. King. Please proceed with your questions.

Good morning, Mimi and Tom Congratulations on capitalizing on the tailwind and the first quarter very nicely done on it.

And what your inventories are and what you expect demand to be.

Sure So Dave definitely the supply chain situation has been challenging it's not just the ports of transportation from the ports containers.

On the disruption has.

It really started with COVID-19 and the supply chain and havent been ready for that consumption to pick up their robustly.

It's not a new problem, we have been managing throughout the pandemic with this situation.

Our last quarter that we just had we had some of these issues as well basically what happened is that whatever inventory came in went right back out.

And there was a worst GAAP to fiscal 'twenty at the beginning of the quarter yet sales were strong. So we again have been managing through this so the good news is things have been getting better at the ports and in the supply chain.

On a very important partner to our brands they've worked with US a lot to date and this is a lower volume time for us at gives us a bit of time to catch up.

That's really helpful and I did want to touch a little bit on back to school and holiday overall as well considering that it looks like.

Even summer camps and by that I mean immediate term are a little bit more normalized to that and as far as all indications are from.

And in person classes at elementary Middle and high schools as well as colleges will be occurring in the back to school season.

And how abnormal obviously last year was you could dream a little dream about how strong back to school can be and then obviously dovetail a little bit into holiday assuming that.

Oh, sorry.

Yeah sure.

So look there are a lot of great pluses out their GDP growth is good and theres been a huge injection of cash and to the economy and a lot of savings and plants, increasing COVID-19 cases have been rapidly declining and you can just feel that people are excited to get back to normal and you just feel of that that America.

And is coming back to life.

Back to school should be more normal this year than last year and it was completely and not normal at last year.

And we gathered a lot of data about back to school, we estimated about 2 thirds of students attend at only virtually.

Back to school for US starts in late July we do of significant business in August and then it trails off in September.

So we are really watching to see what the school districts are saying all of school districts of not decided definitively what theyre going to do next year, but there's a big push to get back in person and so we think that that is going to be of positive for our business. We also think that there are nice underlying drivers like the.

Enhancements to the child tax credit and that's going to start and the middle of July So people are going to get payments directly into their accounts.

And this timing coincides nicely with back to school at is going to continue through of right up until holiday. So it may help with gift, giving as well and so look.

And we see lots of great signs and our business, we see lots of great signs of the economy. There was a tremendous amount of disruption last year. So of the consumer patterns are different and so we are taking all of that into account and are optimistic that know that and if there's a lot to come and the back part of the year.

<unk>.

Very helpful I'll take the balance offline. Thanks.

Thank you.

Our next question is from the line of Jonathan Komp with Baird. Please proceed with your questions.

Yes, hi, Thank you first I wanted to ask on journeys, maybe separate of consumer demand of our ability and willingness to spend.

How are you thinking about positioning and the assortment and just looking at how strong journeys has been and any commentary on the balance of the seasonal summer season here and then how you are positioning may assortment for back to school and fall winter.

Sure.

So first of all I, just want to give a shout out to our merchants they place the right bets on the right product they have so much.

<unk> just navigating the twists and turns of the teen market end and clearly the twists and turns of the pandemic, what we have been seeing and this latest fashion cycle and John you know we spent a lot of time talking with you about the retro athletic cycle, which was the cycle right before we went into the pandemic.

And we started to see last year that there was a real shift into what we call more casual product I talked about it on on the call. We saw casual in terms of sandals in terms of <unk>.

We saw the propensity of that consumer to shift away from fashion athletic, which they all of those are consuming into a more more casual assortment.

But this is a real positive for our journeys business because we are uniquely positioned.

And to serve the customer in the casual assortment. What's interesting right. Now is that teams are finding inspiration for whatever they are wearing and just reinterpretations of throwback style. So 19, <unk> 1990 of the.

And that 2000, and fashions and Theres, a lot of diversity and fashions and and styles right now kick talks videos and other social media team.

<unk> lot of show their individual style and that is just playing nicely into the assortment, we have their borrowing bits and pieces.

And what they are seeing and this is translating into just such creativity and such wonderful displays of of.

Our fashion and so we expect that's going to continue through back to school and back into and to holiday and casual has grown as a percentage of our business every quarter last year and also in Q1.

Okay, and Thats really helpful. And then on 1 on just the licensed business can you give a little more detail on what's driving the Levi's group.

And then.

And when you look at the licensed portfolio combined currently how do you think about the opportunity for the brands that you have currently.

Sure.

We have.

And traditionally in our licensed brands business, we have been at double digit operating margin with really good return on invested capital.

And we knew that we needed to add of license as the consumer appeal of some of the licenses that we had and our portfolio had been waning and sales had been shrinking not enough to support our infrastructure and we've been searching for the right opportunity for some time and so Levi's clearly just at an incredible iconic brand name with.

And and allows us to.

<unk> and <unk>.

Styling that we couldn't otherwise hit and so we like what we're seeing so far of the pandemic delayed our ability to capitalize on this investment, but the first quarter and the strength of the sales and the bottom line I think show where the opportunity is and we acquired a few other licenses and I think the infrastructure exists for us.

Plug additional licenses into and so I'll ask Tom if he would add anything John on opportunities on I would say, we're excited about this opportunity of <unk>.

Good driver of return on invested capital of severity asset light model and the arrangement we have with co gas provides a lot of capabilities from a sourcing point of view.

So we're doing well with that business, we've got a strong order book and we really like how thats progressing.

Yes, great just 1 more Tom if I could thinking about first half performance here.

And back out some of the 1 time benefits you highlighted it looks like operating margin still trailing fiscal 2020, and the first half so.

Should we think about maybe the full year of getting back to that 4.5% operating margin level you had for the full year of fiscal 'twenty and then and.

And then.

Growing from there.

Yes, so John I think that we are clearly not out of the pandemic and there are a couple of our businesses Johnson of Murphy and Schuh in particular that would not have been operating at full strength during the first quarter and so when you think about at Schuh stores were opened for only 20% of their time and yet in spite.

Of that the strength of digital was so good debt, we almost net fiscal 'twenty sales level. So you can imagine that there is just more to come with the opening of stores and continued strength of the digital business and then Johnson Murphy, we've talked also about the fact that.

That consumer went into hibernation and so we were very pleased to see how much debt business grew and strengthened over the course of the first quarter at is going to take a little bit of time. So I think that that is largely some of the of.

The drivers.

That gives us opportunity going forward and Fortunately journeys and the strength of journeys and licensed brands were able to.

Even overcome.

The.

At the time that we need for those businesses to recover and deliver a very strong first quarter performance and so I'll add to Oh.

I'll ask Tom to add to that.

Yes, I think so I don't have much more to add to that that's of great. Great summary of what the opportunity that we see going forward.

And you don't continue to improve our operating margins.

And we've talked about the licensed brands business. There is further opportunity to improve the digital penetration with.

And with journeys and we like we are.

The competitive positions, both journeys and schuh have and their marketplaces, we see further opportunity to improve the margins at at Schuh and Johnston <unk> Murphy I think we've got the right team in place here to be able to recover from the pandemic and we've got some good items at Johnston <unk> Murphy.

And that are getting a lot of traction and they are selling well. So we like the opportunity and the ability to ever Johnston <unk> Murphy business recover and keep in mind and branded business. We have better margins. We already have the omni channel distribution strategy put in place. So we see a lot.

A lot of tailwind and place for us to be able to start improving our operating margins and I think that to have imagined we could be back to the pre pandemic operating margin levels and quickly and <unk>.

Thing that is certainly within our line of sight more so because of how quickly.

And economy has opened up I think when you think about our overall of formula for profitability.

<unk> talked on the call about a great opportunity for growth and our digital business, which has healthy double digit operating margin at.

And at.

Chances to get even better with size and scale the opportunity to reshape our cost structure and our store channel we.

<unk> signed up for rents that were outsized given the shift to online and the pandemic disruption to retail along with a significant number of our leases coming up for renewal as Tom talked about 40% of our leases coming up for renewal has given us a chance to reduce rents even faster which is the most important part of reshaping our.

Our cost structure and so when you think about our ability to get to pre pandemic levels and perhaps beyond those of the real drivers and the bottom line is that we mostly believe that that opportunity exists because of the competitive strength of our businesses that we've discussed.

That's all very helpful. Thank you very much.

Thank you.

At this time, we've reached end of the question and answer session and I'll now turn the call over to me on for closing remarks.

Thank you everybody for joining us today, we hope you have a great holiday weekend.

Thank you.

Thank you. This will conclude today's conference you may disconnect. Your lines of at this time and thank you for your participation.

Q1 2022 Genesco Inc Earnings Call

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