Q4 2022 Genesco Inc Earnings Call

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Good day, everyone and welcome to the Genesco fourth quarter fiscal 2022 conference call.

Just a reminder, today's call is being recorded I'll now turn the call over to Darryl Macquarie Senior director of F. Peony. Please go ahead Sir.

Good morning, everyone and thank you for joining us to discuss our fourth quarter and full year fiscal 2022 results.

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 company's SEC filings, including the most recent 10-K and 10-Q filings for some of the factors.

The impact of Covid, 19, and supply chain issues that could cause differences from the expectations reflected in the forward looking statements made during the call today.

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

All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release.

And in schedules available on the company's homepage under Investor Relations in the quarterly earnings section.

I want to remind everyone. We have posted a presentation summarizing our results that is accessible on our website.

With me on the call today is Mimi Vaughn Board Chair, President and Chief Executive Officer, who will begin our prepared remarks with an overview of the period and the outlook for fiscal 'twenty three.

And Tom George Chief Financial Officer, who will review the quarterly financials in more detail provide guidance for fiscal 'twenty three and then turn the call back to Mimi will discuss strategic initiatives to drive our business in the coming year.

Now I'd like to turn the call over to me.

Thanks, Darryl and good morning, everyone. Thank you for joining today.

A very strong holiday season concluded an outstanding year.

Throughout fiscal 'twenty, two we accelerated our recovery from the pandemic and delivered record results for our footwear companies, even as we navigated a number of acute challenges.

Despite multiple COVID-19 varian bottlenecks across the supply chain labor shortages and higher costs.

Capitalized on the opportunity of a strong consumer spending environment to drive our business forward.

Our exceptional results underscore the earnings power of our business model. The solid foundation for growth, we built through the strong competitive positions of our retail and branded concept and the successful execution of our footwear focused strategy.

My sincere thanks, and congratulations to our incredible teams across the company for achieving this great success.

There are several key achievements that defined the year.

We grew revenue more than 35% over last year and 10% over fiscal 'twenty.

Margin expansion and meaningful expense leverage drove record operating income for our footwear businesses as we achieved an operating margin above 6%.

We generated $240 million of operating cash flow, putting us in a great position to further invest in our business and return over $80 million to shareholders through share repurchases equal to 9% of outstanding shares and.

And we delivered record adjusted earnings per share of $7.62, an increase of more than 65% over fiscal 'twenty.

Additional highlights include capitalizing on the accelerated shift to online spending and holding onto last year's almost 75% gain to reach almost a half a billion dollars of digital sale.

Growing our branded wholesale business by almost $90 million versus two years ago, while improving profitability, adding new licenses and strengthening retail partnerships and.

And increasing store revenues over 40% from last year, and nearly achieving fiscal 'twenty level, despite having 55 fewer stores.

Overall, our results highlight the work we've done to create and curate leading footwear brands and importantly to strengthen our position as the leading destination for teen and youth branded fashion footwear.

In today's channel less world, where the consumer can truly shop anywhere.

<unk> and shoes growth underscores the tremendous loyalty developed with existing customers and compelling proposition offered to new customers.

Team's view us as the unparalleled fashion authority choosing fashion right brands and styles validating whatever brands. We're currently selling and they are increasingly turning to our concept for their branded footwear needs.

We are not dependent on any one brand for the majority of our revenue, but rather 10 or more brands typically constitute 80% of what we sell.

Friend, driven teams, who are looking for the most current assortment of fashion footwear that is always evolving whether they want to make a statement to stand out or want to fit in and be just like their friends come to journeys and schuh to buy multiple brands and seek advice from our knowledgeable fashion advisor.

Our people and our youth focused full service environment.

The effects from the pandemic on how consumers shop, rather than harming our business was instead the catalyst to reach new Heights.

Shifting now to the fourth quarter. The work we did to have the right assortment and the right holiday marketing campaigns helped deliver Q4 results well ahead of expectations.

Consumer demand was robust and we nonetheless believe our results would have been even stronger had we been able to maintain historic levels of inventory.

Our performance over last year's Q4 was driven by store sale and versus two years ago by digital and branded wholesale sale.

Q4 highlights include revenue up 14% over last year and 7% over two years ago.

Remarkably we achieved this despite overall inventory being down almost 20% versus last year and down by one third compared with the fourth quarter two years ago during the key holiday period.

With much more limited promotional activity coupled with price increases.

Price selling was very strong fueling a 300 plus basis point increase in gross margin versus last year, and a 200 basis point increase compared to two years ago much stronger than expected.

Hi herself and it's better than expected gross margin resulted in double digit operating income expansion over pre pandemic level and record adjusted earnings per share of $3.48.

An increase of more than 25% compared to last year's holiday season, and 13% compared to two years ago.

From a channel perspective, the power of our Omnichannel strategy was on full display in the fourth quarter as consumer appetite to shop in person, especially in the days, leading up to Christmas drove an almost 20% increase in store sales over the year ago period.

Strong demand in stores with many items selling as soon as they hit the store floor meant less store inventory than usual was available to service online demand.

We saw the biggest shift to in store shopping in the U K as shoe stores were opened 100% of the quarter compared to roughly only a third of the days last year.

Despite the strong in store sales in both journeys and schuh, we held onto almost 90% of last year as digital sales in total.

So turning now to discuss each business I'll start with journeys and begin with a huge congratulations to the team on setting all time record of sales and operating profit for the year.

Journeys performance underscores the competitive advantages that business has built and how it has leverage those advantages to further separate itself as the destination for branded fashion footwear for teens.

All of Germany's top 10 brands experienced year over year growth in fiscal 'twenty, two with most notching significant gains.

The current fashion cycle, which I've been describing as shifting more into casual away from fashion athletic plays into journeys strength.

<unk> journey as well among its competition to deliver this assortment.

In anticipation of continued supply chain pressure, we encourage customers to shop early and they did and the holiday season got off to a very strong start.

At this peak volume time as the season unfolded, while traffic remains solid conversion, which had been robust dropped off as journeys was not able to quickly replenish in demand products to match outside holiday demand.

While journeys talented store teams drove sales above last year's levels selling whatever was available. We believe journeys sales would have been meaningfully higher had we been able to get the inventory receipts we had ordered.

That's a positive tight inventory led to unprecedented levels of full price selling with customers also willing to absorb price increases to secure a desired product driving further margin acceleration.

Finally, the journeys team continues to live its core values of being a family with an attitude that cares.

Partnering during the holidays with nonprofit candid and customers have to register for its largest national community activation and donating $600000 for bikes for underserved used across the United States.

As part of this initiative journeys headquarters employees Belton donated 300 bikes and helmets to two Nashville Elementary school just in time for the holidays.

Shifting now to the U K, we were incredibly pleased with holiday results at Schuh capitalized on pent up consumer demand and delivered Q4 constant currency revenue up more than 30% versus last year and 12% versus two years ago.

Like journeys schuh strength is its ability to deliver the fashion brands desired by its use consumer and shoes drove a nice growth across its diversified mix of both casual and fashion athletic footwear.

As a result of its stellar execution throughout the pandemic navigating multiple store openings and closings and making the most advanced digital capabilities Schuh garnered improved product access being moved up a tier by a number of its high profile brands.

This step forward and access coupled with less severe supply chain disruptions and strong inventory management allowed schuh to be in a better inventory position over the holidays.

U K customers were more comfortable shopping in person leading to better in store traffic.

<unk> retained much of its digital gains from when stores were closed last year, resulting in a Q4, 46% digital penetration.

Lastly, less promotional activity and product mix also drove strong margin gains.

Turning now to our brand aside our plan to re imagine Johnston <unk> Murphy for a more casual more comfortable post pandemic environment continues to prove out in the marketplace with the biggest Q4 bottom line gain over last year all of our businesses.

J N M continues to expand its focus from not just the products consumers need for work, but the products people desire for everyday life.

Q4 strong sell through in boots, casual and casual athletic footwear and equally strong performance in apparel and outerwear demonstrates just how far we've come making J N M and attractive multi category lifestyle brand.

This pivot has included new strategies for how and where we reach our customer.

New product story marketing campaigns have been very effective and we've seen the most growth in our digital channel up 14% compared to Q4 last year and growth in our under 35 customer base up 30% in Q4.

Much stronger demand and supply constraints pushed inventory more than 50% below pre pandemic level hampering our ability to capture all of the demand during the holidays and return J N M to pre pandemic sale never.

Nevertheless, we're excited about gm's trajectory unexpected upside in the year to come.

Rounding out the discussion momentum for licensed brands accelerated as the year progressed notching impressive sales growth of 70% over last year as we successfully turned around the business and capitalize on the new capabilities, we obtained with the toe guest acquisition.

While supply chain disruption and excess freight costs weighed on the P&L throughout the year, we saw growing demand for both Levi's and dockers footwear in value in full price channel positioning the business for improved profitability as these challenges subside and we continued to take advantage of the white space.

<unk> in the marketplace.

In conclusion, our footwear focused strategy is delivering results.

Covid provided the real opportunity to transform our business at a more rapid rate.

We are a healthier company today and delivered growth and improved earnings as a result of higher digital sales and profits are more profitable store channel and growing branded wholesale sales.

Our future is bright as we build upon the progress we have made.

Turning now to the current year fiscal 'twenty two had headwinds I have discussed and also some unique tailwind, namely healthy consumer spending in the first half due to significant government stimulus.

Unusually good environment for full price selling as a result of high demand and scarcity of supply and we benefited from some one time gains related to rent and government relief, mostly in the U K.

With respect to fiscal 'twenty, three sales have gotten off to a much stronger start versus last year, but a slower start versus pre pandemic driven largely by the lower inventory levels and lagging tax refunds.

We are expecting year over year trends to moderate as we anniversary stimulus and the lack of inventory further pressures growth early in the new year, especially in the first quarter.

Looking further into fiscal 'twenty, three we're working hard to overcome the cost pressures that are prevalent today and we don't anticipate the factors that led to such a strong full price selling environment to be sustained.

Tom will provide the financial details of our outlook momentarily, but we felt confident about delivering topline growth on top of a very strong fiscal 'twenty two.

Consistent with what I have outlined we are planning the back half to be much stronger than the first half as inventory levels improve logistics cost pressure starts to ease and continued price actions helped offset higher costs.

Fiscal 'twenty three will also be an investment year for Jan N. As we advanced the work on the brand's repositioning.

We expect adjusted earnings per share for fiscal 'twenty, three to be between $7 and $7.75.

And believe somewhere close to the middle of the range is where the year will land.

While there are a number of variables that play are result over what has been a very volatile past 24 months gives me great confidence in our team's ability to execute.

Finally, our ESG program, we will achieve an important milestone early in the year with the completion of our inaugural enterprise wide carbon footprint assessment.

Our work continues to progress with more to come when we publish a comprehensive ESG report later this spring.

Now to close I'd like to again, thank our people for their outstanding work and diligent effort through another challenging year.

Throughout fiscal 'twenty, two our employees stepped up wherever needed and I can't overstate how critical this work was to our success.

Companies succeed like we have because of strong teams and dedicated people who help them achieved new heights.

I'm incredibly proud of what we accomplished together now I'd like to turn the call over to Tom.

Thanks Mimi.

I would like to Echo my remarks regarding the continued success of our key strategies and our amazing people.

With the year now behind US, we feel even more confident in our portfolio and the ability of our footwear focused strategy to drive strong results.

Throughout the year, we saw continued strength in all of our businesses.

Maybe in a strong Q4.

Which was driven by our team's ability to execute the strategies put in place.

Before I get into the details of the quarter.

To again remind you.

We have done throughout the year that we believe comparing to our pre pandemic fiscal year 'twenty two years ago typically provides the more difficult and often most meaningful assessment.

Of our business.

However, when comparing to fiscal year 'twenty keep in mind, our strategy has changed our business.

E Commerce has become a larger percentage of sales one with wholesale sales for licensed brands.

These changes come with an overall lower gross margin rate due to the impact of drugs shifting expenses.

And the expansion of our wholesale volume.

However, this should be more than offset with lower SG&A from these businesses.

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

Turning now to the specifics for the quarter Consol.

Consolidated revenue was $728 million up 7% compared to fiscal 'twenty.

Journeys grew 2%, while schuh grew 12% on a constant currency basis and.

And we more than tripled our licensed brands business.

Virgin him the quarter started off strong in November .

But supply chain challenges led to a significant lack of inventory, which led to G&A and sales.

Being down 12% for the quarter.

From a channel perspective, we experienced increases in both the E com and wholesale channels.

While we drove robust growth in the store channel sale.

Sales remained 4% below fiscal year 'twenty.

The scarcity of inventory impeded sales.

Worth, noting as well is that we ended the quarter with 55 fewer stores.

Then we had in fiscal year 'twenty as we optimize our store footprint.

On a year over year basis, However, total company comp store sales were up 10%.

And we're driven by comp sales of 6% at journeys.

22% at Schuh and.

And 55% at Janney.

Finally, ecommerce sales were up 36% for fiscal 'twenty.

And accounted for 22% of total retail sales.

Up from 17% in fiscal year 'twenty, while we also held onto 88% of last year's gains even while having the majority of our stores opened during the quarter.

We're again very pleased with gross margins, which were up 310 basis points to last year.

And 200 basis points versus two years ago.

Strong full price selling and price increases offset the channel mix impact of increased e-commerce .

And wholesale and increased logistics costs.

Increased logistics costs put approximately 120 basis points or.

Or $9 million of pressure on Q4 gross margin.

And where the greatest drag.

Our branded businesses.

Journeys and schuh gross margins were up three.

330, and 250 basis points, respectively to fiscal year, 'twenty, driven by more full price selling and higher footwear asps.

Jane EMS gross margin was up 420 basis points to fiscal 'twenty.

Also benefiting from strong full price selling and price increases, which also drove the release of slow moving inventory reserves.

Finally licensed brands gross margin was down 190 basis points to fiscal year 'twenty as.

As we experienced almost 1000 basis points.

Our almost $5 million of pressure from additional logistics costs.

Which more than offset margin improvements in the business.

Adjusted SG&A expense was 39, 8%, which was 170 basis points more than fiscal 'twenty is deleverage from investments in marketing and higher incentive compensation more than offset leverage in occupancy and selling salaries.

As a reminder, our incentive compensation plan is based on year over year performance.

And comparatively speaking we had a much lower bonus expense in fiscal year 'twenty Q4 than we did this year.

The other major driver of the deleverage was in marketing expense, which was due to our efforts to drive our digital footprint as well as brand awareness.

This coincided with price increases in digital marketing cost include.

Including increased cost per click.

It's worth mentioning.

Last year's SG&A levels were unusually low benefiting from tens of millions of dollars of one time COVID-19 rent relief.

We did however experienced significant leverage in occupancy costs, driven by both permanent reductions and some temporary rent waivers and government relief in Canada and the U K.

Regarding our rent reduction efforts for fiscal 'twenty, two we negotiated a permanent reductions through 181 renewals, which achieved a 16% reduction.

And rent expense in North America on a straight line basis.

This was on top of a 22% reduction for 123 renewals last year.

These renewals are for an even shorter term averaging approximately two years compared to the three year average we have seen in recent years.

With 45% of our fleet coming up for renewal in the next couple of years.

This continues to remain a key priority.

Finally, we are pleased with our ability to leverage selling salaries, particularly.

And this higher cost in more difficult labor environment.

As we effectively utilized our workforce management tools.

Last quarter, we reported that we had identified the full amount of our $25 million to $30 million cost savings target.

A large part of these savings are from current and future reductions in store occupancy.

We will continue to focus our multiyear cost savings efforts on store channel profitability.

Including further efforts on reducing occupancy costs.

Gaining more efficiencies with selling salaries.

To mitigate the effects of wage pressures.

And continually look for ways to further drive efficiencies given the changing cost structure of the business.

In summary, fourth quarter adjusted operating income was 66 million or nine 1% operating margin compared to $59 million or eight 8% for fiscal year 'twenty.

Versus last year operating income improved by $2 million.

Or two 6%.

Again last year's SG&A levels were unusually low benefiting from significant COVID-19 rent relief.

The impact of this was greatest at journeys in a large part led to lower operating income this year, despite higher sales and gross margins as journeys Anniversaried. These one time gains.

The profitability achieved during the quarter provides strong evidence.

The operating margin expansion that we are continuing to see what our footwear focused strategy.

As well as our ability to execute our growth algorithm.

Maybe you mentioned for the fiscal year, we achieved north of a 6% operating margin, which was an important milestone.

In our long range plan.

For the quarter, our adjusted non-GAAP tax rate was 25%, which compares favorably to the 37% last year or two the impact of the cares Act tax provisions.

In the fourth quarter of fiscal year 'twenty one.

This resulted in adjusted diluted earnings per share of $3 48 for the quarter.

Which compares to $2 76 since last year and.

And $3.09 in fiscal 'twenty.

Turning now to the balance sheet Q4, total inventory was down 24% compared to fiscal 'twenty on sales that were up 7%.

At the end of the quarter all of our business experienced inventory shortfalls versus fiscal 'twenty with the most impacted and journeys in January which were down 20% and 39% respectively.

Our strong net cash position of $305 million, an increase of over $120 million versus last year was driven by our strong operating performance.

Additionally, we consolidated operations and sold a warehouse.

Realizing a sizeable gain on the transaction.

This strong performance and our confidence in the business enabled us to continue to return cash to our shareholders.

Due to the repurchase of 840000 shares of stock for $52 million.

At an average price of $62 22 per share during the quarter.

Total fiscal 'twenty two share repurchases were approximately $1, three 6 million shares or 9% of outstanding shares.

At a cost of approximately $82 8 million.

And at an average price of $60 88 per share, which effectively used up our September 2019 $100 million share repurchase authorization.

As a reminder to continue to support our capital allocation strategy.

We recently announced the approval of an additional $100 million repurchase authorization in February of this year.

Which represents our current availability.

Regarding capital allocation strategy, our immediate priority is to accomplish the substantial task.

Inventory and then invest in the business and continue to return cash to our shareholders.

Through opportunistic share repurchases.

Capital expenditures were $19 million, including our new headquarters and depreciation and amortization was $11 million.

We opened two stores and closed 11 during the fourth quarter to in the quarter with 1425 total stores.

As we look towards fiscal year 'twenty three guidance. We're excited about the year ahead, and the continued momentum of our business.

But we recognize that we are faced with supply chain delivery delays increased product and logistics costs.

And the lapping of significant stimulus last year.

In the first half rigs.

Regarding supply chain delays, we expect inventories to normalize.

Late Q2 early Q3.

In addition, we expect to experience wage pressures throughout the year.

After considering these factors we expect to.

Full year 23 sales to grow 2% to 4%.

For adjusted earnings per share, we expect a range of $7 to $7.75 per share with our best current expectation that EPS will be near the midpoint of the range.

Note that our full year guidance does not anticipate further significant supply chain disruptions or a more rapid escalation of inflation or geopolitical conflicts.

Regarding our individual businesses for journeys, we expect first half sales to be below comparable.

School year 'twenty two.

Since journeys benefited considerably from stimulus last year, we then expect growth in the back half.

As we assume inventories will normalize to pre pandemic levels and we benefit from further price increases.

Our shoe, we expect growth for the year driven by more normalized store openings.

Virginia, and we expect to return to pre pandemic sales levels and.

And we expect growth for licensed brands as well rigs.

Regarding gross margins, we expect gross margin rates to come down versus last year by roughly 40 to 50 basis points due.

Due mainly to increased markdown activity in the quarters in which markdowns normally occur as compared to essentially no promotional activity last year.

We expect adjusted SG&A as a percentage of sales to deleverage in the range of 10 to 40 basis points.

This is driven by leverage from reduced performance based compensation.

Being offset by Anniversarying significant one time rent abatements, primarily at schuh.

And selling salary wage pressure in.

In addition, we will have increased marketing investments to drive our business forward.

Our guidance assumes no additional share repurchases for the fiscal year, which results in fiscal 'twenty three average shares outstanding of approximately $13 4 million.

But we can repurchase opportunistically with the availability under our most recent authorization.

Furthermore, we expect the tax rate to be approximately 28%.

In summary, this all results in expected operating margin below fiscal year, 'twenty, two which beyond cost pressures in large part is due to a difficult first quarter.

Our belief the factors that led to such a strong full price selling environment will not be sustained.

While we typically don't provide quarterly guidance I want to provide some perspective on Q1 as.

As I said, we are lapping the benefits of fiscal year 'twenty two stimulus while at the same time experiencing delivery delays as a result, we expect Q1 sales to be below last year, which is the main driver of a good amount of SG&A deleverage in the quarter.

We were also anniversarying, some onetime pickups like rent abatements in Q1 last year.

Regarding gross margin increased air freight and logistics costs are driving pressure, particularly at Jean Ann.

The good news is we expect overall gross margin to be just under last year's levels.

With all of this we expect a small loss in the quarter, even as first half earnings return more to a pre pandemic cadence also it is worth noting for Q1, we expect to incur a small amount of tax expense.

Due to our inability to recognize tax credits for our international operations.

Now I'd like to turn the call back over to Mimi to discuss the progress and continued efforts of our strategic initiatives.

Thank you Tom.

The result, Tom detailed clearly demonstrate that our footwear focused strategy is advancing our business in this ever changing environment.

This strategy implemented before the pandemic leverages, our teams significant direct to consumer expertise across footwear retail and brand and the synergies between platform.

Driving this strategy, our six strategic pillars that emphasize continued investment in digital and Omnichannel deepening our consumer insights driving product innovation reshaping, our cost base and pursuing synergistic acquisition.

All to transform our business and exceed the expectations of today's consumer whose needs have rapidly advance.

We continually refine our focus within the six pillars to take further advantage of the major changes underway in our industry.

Before we get to Q&A, Let me walk you through the pillars and briefly highlight select initiatives for fiscal 'twenty three.

The first pillar is accelerate digital to grow the direct to consumer channel the.

The investments we have made paid huge dividends and contributed meaningfully to our results. These past two years as we achieved ecommerce sales growth of almost 80% over this time.

Importantly, our online business generate operating margins well into the double digits due to our focus on full price selling disciplined marketing spend and shipping and return policies to reinforce profitability.

This year, we are increasing our investments and resources to support digital.

We also believe continued enrichment of the digital shopping experience through fit refinement try on augmented reality and shop. The look features will further add to digital growth in fiscal 'twenty three.

After a successful virtual try on pilot program with journeys. This past year, we plan to roll out that program across all brands in the upcoming year.

Additionally, we accelerated automation to support Omnichannel growth.

We will benefit from last year's go live of our new cotton on demand system and bespoke E Commerce packing module.

Lastly, we will add to our investment in digital marketing to drive traffic and attract new customers, we expect marketing to be up more than 60% versus pre pandemic spending in large part driven by these digital marketing increases.

Our second pillar is maximize the relationship between physical and digital channel.

During the pandemic, we increasingly saw the importance of these two channels working seamlessly together to provide consumers with their preferred shopping experiences and we're building on and refining this relationship.

Our research has told us that over 30% of journeys target consumers visit local non mall shopping centers two to three times per month and enjoy the convenience of shopping closer to home combined with enhanced Omnichannel services like easier curbside pickup.

We piloted a number of these off mall locations and we're very pleased with the early sales and four wall resolved.

As such we are expanding our portfolio of journeys non mall locations and opening up to 30 new locations. This year.

Well it looks like our new real estate analytics platform will allow us to optimize our site selection as we build out the footprint.

At Schuh, we are opening a new distribution center in Ireland to better support Omnichannel sales there.

With this new center will also increase the efficiency of our Irish operations, while reducing costs, resulting from new duties imposed post Brexit.

Moving to our third pillar building deeper consumer insights to strengthen consumer relationships and brand equity.

Data driven consumer insights and more robust CRM capabilities are key to driving our next big wave of growth.

Cost of the trusted relationship we have with our customers and their parents and the efforts to capture first party data in our stores. We're currently able to identify 80 plus percent of our journeys and Jane M customers.

This year, we will continue our investments in CRM and data analytics, particularly through database growth and loyalty program advancement.

We expect to fully launch our new shoe loyalty program. Following a successful test in fiscal 'twenty to grow our Johnston <unk> Murphy program, which launched last year and advance the work on a loyalty program for journeys.

We will also invest to elevate the journeys and Johnston <unk> Murphy brand through increased marketing campaign and spend to support this initiative.

Our fourth pillar intensifying product innovation and trend insight effort.

We will be utilizing new consumer insights to further innovate Johnston <unk> Murphy's product offering and its accelerated shift to casual.

We have made tremendous progress re imagining the brand highlighting proprietary innovation involving performance advanced cushioning and breathability technologies in both footwear and apparel and growing Johnston <unk> Murphy into its position as the number seven casual brand in the premium channel.

In addition, we will leverage our <unk> capabilities and talent in connection with our new starter and atonic licenses, which have shown strong presale demand and also build on the impressive growth achieved with the Levi's U S mens womens and kids footwear license and category opportunities and areas.

Like slippers flip flops and slides.

Finally, we are investing in a new scalable wholesale enterprise resource planning system to support the growth of our branded platform.

Our five reshaping our cost base to reinvest for future growth has been a continuous effort aimed especially at the store channel and working with our landlord partners to find a solution to rightsize rents to match traffic level.

In addition to the approach Tom outlined for rent reduction, we are improving efficiency wherever we have people intensive activities.

For example, this year, we're investing in new receiving automation in our journeys distribution center, which should lower labor costs and increased productivity, especially during peak receiving periods.

And finally pillar six pursue synergistic acquisitions to enhance growth.

As we navigated an unprecedented environment over the last two years acquisitions, we're not at the forefront of our strategy in spite of the success, we're having with the toga acquisition.

Now that many of the challenges that the pandemic are behind US we will concentrate our efforts on opportunities to leverage our powerful direct to consumer capabilities to grow our branded platform and leverage is synergies.

So now to close.

We are so pleased with the year. We just finished we are even more excited about driving our footwear focused strategy.

To deliver additional growth and shareholder value.

Operator, we're now ready to open the call to questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Steve Marotta with C. L. King <unk> Associates. Please proceed with your question.

Good morning, Mimi and Tom Congratulations on closing out a terrific fiscal year.

Maybe you implied earlier that embedded in your guidance are for a more normalized promotional environment as the year progresses and do you see that just generally because supply lines will be catching up with demand or do you see it a little bit more as a leveling of demand or just.

Wanted to know why you.

Do you think just from an industry perspective that the gross margins that had been our merchandize margins that have been posted.

You know that a little bit will come off of that.

Thank you, Steve so as far as gross margins go if you think about the cadence of the year last year. What we saw is there was such robust demand and limited supply that in the quarters in which we normally take markdowns that as the second and the fourth quarters that we have.

Essentially took no markdowns it was very much an unprecedented environment and I think it it coincide with the opening of our of the country as the Covid vaccines were rolling out and then just stay at an exuberant demand on the part of the consumer.

It really really fueled by stimulus and so as we come into this year and we compare to historical margins. We've learned a lot. We actually think that we will have a better margins on a business by business basis.

But that we are going to give back some from last year, just because of the unusual environment that sustain the new markdowns our merchants are.

Our fantastic, but they are they have set us up to know that that we shouldn't expect to have no markdowns again this year.

Very understandable can you talk about considering this issues with another well known mall based footwear retailer maybe you can discuss your risk mitigation strategies in an effort to avoid similar challenges that they might be feeling currently.

Okay. Thanks for that question.

Journeys is really different and I just want to talk about how different journeys as well.

What journeys and schuh represent is the place for teens and young adults should go buy their fashion footwear.

What we are all about is that teen relationship and we own the teen relationship and when they think about buying fashion footwear.

They think about our concept. So we were really known as the fashion authority, we validate the choices that teens make which is really important they they know that what they buy at journeys that there'll be fashion right and that's a really important.

That's really important offering to give to teens, who are nervous about going to school and making sure that they're there.

<unk> got the right shoes on and they very much like our curated assortment. They like our service model. They think our salespeople are cool theyre very edgy. They look very fashionable our teams are in a phase of discovery and we have the allocated product that our teams really want and importantly, we are not dependent on any one brand as I said.

10, or more brands typically make up 80% of what we sell with more brands are constituting the remaining 20%.

If you walk into our stores or you visit our website at speaks to our consumer it's uniquely speaks to our consumer young consumer branded websites or branded stores stretch beyond our core consumer they're more about the brand or less about the consumer because they're appealing to a number of our consumer segment.

One thing we know for certain about the journeys business has that fashion is going to rotate our whatever's popular today is not going to be popular tomorrow and so what our merchants are incredibly good at is discerning those trends testing brands and styles, knowing what to scale and importantly, knowing when to get out in particular.

Brands and I think that's the key skill that keeps our teams coming back and back again, because they know that we're going to have the right assortment, so fashion rotation and the ability to serve a teen customer so effectively through really decades with evolving tastes is a competitive advantage for us.

And its instituted within our merchant talent and capabilities and our you know she was very much the same thing that mining the ins and outs of fashion and brand rotation is what has us stand out from others.

That's very helpful. Maybe if I could just sneak one more in considering our risk mitigation again and what's going on currently in Ukraine has schuh felt any collateral impact from that either from our consumers.

Hum.

From a retail traffic standpoint, or a digital traffic standpoint, and how do you see that maybe are progressing over the next two or three months and how it could affect you. Thanks.

We haven't yet seen a specific impact that shoe you saw what a an extraordinary back to school and holiday period that Schuh has had and that has carried into this fiscal year.

I think where we would see the biggest impact is really in higher gas prices.

Like the U S. The U K has experienced quite a bit of inflation for all of the same reasons that we have experienced it and you.

You know in that consumer in the U K, we will also be sensitive to just overall inflation and then specifically.

Gas prices there is a tourist element and a tourist element from Europe . In addition from broader Europe , but that that was impacted by Covid and so our business has been operating without that effect and so I really do think it depends on how long this conflict, the last and whether or not a.

Diplomatic resolution can be it can be achieved fairly quickly.

That's very helpful. Congratulations again thanks.

Alright, thank you.

Thank you. Our next question comes from the line of Mitch Cummins with Seaport Global Securities. Please proceed with your question.

Yeah. Thanks, So let me add my congratulations as well.

Thanks for taking my question, So I've got a few.

To start with on the operating margin. So you guys landed at a $6. Three this year. If my math is correct I'm looking around five four to five eight next year pre Covid you were four five so how do you think about operating margin on a normalized basis and kind of what are the puts and takes to get there.

Sure.

Thank you match pre pandemic, our operating margin was at four 5% and we had put our 6% target out there and we were delighted that we hit that are ahead of schedule and it really shows that our business has the earnings power.

That that that we knew would had but we know this year is as I. Just discussed that we were helped by a unprecedented full price selling and so we will get back a little bit but.

First just wanted to talk about how excited we are about the organic growth we have in our business because there's a very close link between that and and operating margins and so we've said 2% to 4% this year, but that's following a really robust year of growth and going forward. We expect that we're gonna be have growth in the mid single digits and our first one.

You talked about this year and then let me talk about a subsequent years, we feel good about this year because while we picked up stimulus in the front half of the year largely helps the journeys business. We lost significant sales on the table in the back half. So I think our inventories are held in there well but at Christmas.

We just hit the wall and I feel like we left a lot of sales on the table. So when you think about this year, we're going to have fewer sales in the front part of the year, but a lot more sales in the back half of the year and in fact, we are less more sales on the table. Then we gained during stimulus and the second thing is that price increases.

That we have taken are sticking and so that gives us the confidence in this year.

Our business is stronger post pandemic our business has changed this is a transition year, but in general the growth algorithm to get us to the mid single digits has three pieces. The first is that we're gonna grow digital which is now 21% of our sales. If you think about historical growth of digital within 15 years to <unk>.

80% at 10, or 20% that alone gives us 2% to 4%.

We will grow wholesale that's the second thing we added almost $100 million of wholesale sales this year and going forward. We think there's more opportunity in licensed brands, we think that with the you know.

That the new Johnston <unk> Murphy proposition that we have quite a lot of opportunities.

On the wholesale side as well and then lastly, I talked about our new store strategy for journeys, where we will be opening off mall locations. We've been very pleased with the profitability and the sales that we've seen there and the opportunity to opening more stores will add up to another 2%.

Of growth per year and on wholesale that's about another 1%. So so in addition to our store comp we feel like there is ample opportunity for growth all of this with a more capital light model and a more diversified beyond the store channel so coming back to the 6% operating margin we'd be there this year.

Not for a tough first half and a tougher first quarter, especially so you know we feel confident that this.

With this growth, we could get to higher than 6%, we'd like to see how the business normalizes. This year and we will come back to you and let you know how it will evolve you know after this year.

If I look at the operating margin by operating group you know journeys for 'twenty. Two I think came in around 10, and a half so that's actually slightly better than prior peak, but your other three businesses are still well below prior peak, particularly Jan M. M. Life is now I know license looks a lot.

Different than it did prior peak, but how do you think about.

The operating margin opportunities.

Those businesses I mean can G&A them get back to a seven can license to get back to a 10.

Can you maybe just quickly address that.

Yes, so going business by business. When you look at Johnston <unk> Murphy Johnston <unk> Murphy's historical operating margins were actually 10%.

And brand margins are typically in the double digit level and as we talk about Johnson Murphy's future being more wholesale oriented and being more digital and that allows us to lift operating margins beyond what we were able to achieve in the store channel so getting back to a 10% certainly.

As achievable for Johnston <unk> Murphy this year is a.

That's my ear as we are investing in casual product we've been very pleased with the growth we've seen on casual and we're investing in marketing we've done a good job attracting E. Ah you know the under 35 year old customer, which is going to be key to lots of growth for the brand going forward on this.

Sue front shoe benefited from.

Some a good amount of government.

Government aid last year, and we also had a number of rent concessions and we that business also is stronger in the market are really taking advantage of consolidation in the market, but we're gonna have a catch up year as we anniversary those one time pickups and she was operating margin.

We do think that as we are able to drive gross margins, we're able to leverage overall SG&A bring down rent expense that we should get back to our first step is to historically, we were achieving 5% there's nothing fundamentally different in that business versus the journeys business that would prevent you from getting.

To to journeys operating margins and then my final licensed brands was weighed down this year by a good amount of logistics costs and so we expect metal margins for next year and really really you know to digest the sales that we had in and choose the earnings out of that business.

I've kind of mentioned, maybe just to summarize Mitch I mean, where are we.

We're on a solid foundation here to generate 6%, we've got opportunity to expand even further with the initiatives that Mimi has talked about and business by business journeys is already.

At 10% type business shoe in the long run is going to be lower than journeys, mainly because the real estate costs because they are offering their gross margins are expanding.

Johnston <unk> Murphy business is a more premium priced omnichannel vertical brand that should be double digits in our licensed brands business as a wholesale capital light kind of business with a lot of opportunity and that should be a double digit business as well and on the central costs. We've done a good job always keeping those below a 2%.

Well, so we've got a good opportunity to grow 6% to even higher levels.

Thank you. Our next question comes from the line of Cory <unk> with Jefferies. Please proceed with your question.

Good morning, and thank you for taking my questions. You mentioned that you would be an investment year and Johnston <unk> Murphy, particularly in casual styles.

What I'm wondering is have you witnessed.

Any improvement in dress as.

Covid cases have come down and restrictions opinion.

It's interesting that you asked that Orient and yes, we have seen improvement in dress. In fact, you know we have typically dominated the dress category, but what we're seeing is that we are viewing that to be just pent up demand for events.

And for people, who perhaps have looked at their shoes, and say I really need a new pair of dress shoes, we actually don't think that there is a trend back into dress or Jane M customers in a good place they've been saving a lot. They got used to comfort and once you experience comfort you really never go back and.

We've got an opportunity here with the pandemic gave us a chance to re imagine Johnson Murphy from a product point of view and the work that we're doing is really is really paying off we've pivoted harder into comfort and casual that category has grown more.

The proof point.

Well.

What we're doing is working is really the strong sell through of our spring and our fault lines and in November we were up above our pre pandemic levels of sales driven by casual product, but but that's simply ran out of product. So we're investing even more in product. This year are more in casual will continue to sell through.

Along with that and our apparel and accessories business has been fantastic. It's now 40% of our business. So the prospects to double the size of the brand again like we did coming out of the great recession. We would think is very much a.

Within our grasp.

Yeah.

That's great and then with regard to the full year.

Gross margin outlook.

Can you unpack, how we should be thinking about the guidance, particularly as it relates to freight I believe are the.

The gross margin is guided down 40 to 50 basis points and then can you just discuss plans in place to offset this headwind and other inflationary pressures that you are witnessing.

Yep that give you a little bit of insight on the down 40 to 50 basis points as Mimi mentioned.

Most a lot of that is related to the fact that this year fiscal year 'twenty. Two it's just such a promotional lack of promotional environment that we just really don't think is sustainable going forward. Most of the pressure on the gross margin is going to be in the Q2 and Q4 periods because those are the normal periods, where you have.

Most most smartphones.

And on the freight and logistics side, we do have pressure in the first quarter of additional freight and logistics cost of about $10 million in the first quarter of this year, that's putting pressure on the first quarter and then the second quarter. There is an additional.

$6 million to $7 million in the second quarter, so that puts a lot of pressure on the gross margin.

In the first half of what we're doing from a mitigation point of view is we're continuing to monitor the market continuing to look at our.

Our current freight and logistics contracts, all the way from surface as well as our container cost contracts and continuing to look at ways to be creative from that perspective, and continuing to look at potential alternatives. Other methods of a surface transportation as well as other methods of.

Transportation. So we'll continue that were obviously that's high priority and we're continuing to work on that pretty much 24, seven to see what we can do to mitigate the risk of additional risk of these costs.

Great and if I could just sneak one more in can you maybe unpack what's embedded in the 2% to 4%.

Revenue growth outlook, what stores expected to be down slightly and square footage to be down 1%.

Yeah.

So yeah I'll give you some perspective on the on that Corey from a total year perspective.

Relative to the fiscal year 'twenty two I think that's the best way to do that we actually in the end, although we've got some lower stores lower amount of stores. We expect some growth in the store channel driven by a couple of things one of them assuming.

And it's a.

The reality and not have an assumption now is the shoe business all their stores are assumed to be open now. So we'll see some good growth in the store channel from the shoe business and some growth in the <unk> business as we get more more inventory and even though there are some fewer stores there are some new store openings.

With journeys and we'll see some growth in their stores as well. So net net the store channel growth will grow there is somewhat of a little bit of a headwind on the direct business, primarily driven by the shoe business because with all those stores now open there they'll come back some off there.

There are digital business because of the go to the stores.

And then Theres also in Canada, we are assuming all those stores are going to be opened slept benefited the journeys store growth as well.

So that gives you a little bit perspective on stores and digital I'd hand, it over to me now so just by business and I think to reinforce what Tom was saying that in journeys as we said we will give up some sales in the front part of the year as we lap stimulus will pick up quite a lot of sales in the back part of the year when we re.

Inventory and sales we felt like we left on the table. So we think there is a little bit of upside in the journeys business even in spite of the stimulus.

Schuh and licensed brands. We also think there is a law.

Little bit more growth in those businesses, but the biggest amount of growth as Johnston <unk> Murphy Johnson Murphy was not back to pre pandemic levels and we believe that they won't get there, which represents a meaningful amount of growth for Johnston <unk> Murphy. This year. We think the demand is there it's just a matter of catching up with supply.

Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Ms. Wang for any final comments.

Thank you for joining us today, and I look forward to talking to you on our next call.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.