Q1 2024 Genesco Inc Earnings Call
Good day, everyone and welcome to the <unk> first quarter fiscal 2024 conference call. Just a reminder, today's call is being recorded I would now I'll turn the call over to Darryl Macquarie Senior director of F. T. N. A please go ahead sir.
Good morning, everyone and thank you for joining us to discuss our first quarter fiscal 'twenty four result.
Participants on the call expect to make forward looking statements, reflecting our expectations as of today, but actual results could be different.
That's gonna refers you to this morning's earnings release, and the company's SEC filings, including its most recent 10-K and 10-Q filing for some of the factors that could cause differences from the expectations reflected in the forward looking statements made today.
This one is also expect to refer to certain adjusted financial measures during the call all non-GAAP financial measures are reconciled to their GAAP counterparts.
And the attachments to this morning's press release and in schedules available on the company's website in the quarterly results section.
We have also posted a presentation summarizing our results here as well.
With me on the call today is Mimi Vaughn Board Chair, President and Chief Executive Officer.
And Tom George Chief Financial Officer.
Now I'd like to turn the call over to me.
Thanks, Sara good morning, everyone. Thank you for joining us.
While this quarter was undoubtedly a challenging one I'd like to provide context on the factors impacting the current operating environment.
Putting the shifts we've seen in consumer dynamics within our journeys business, what we've learned from them and most importantly, the immediate actions, we're taking to improve our performance against a difficult macro backdrop across the industry.
Before we get into the details I'll start by underscoring that despite the near term turbulence, which we have reflected in our revised outlook for fiscal 'twenty four I am confident in our footwear focused strategy and believe in our future prospects.
While the first quarter was even tougher than we anticipated for journeys, both Johnston <unk> Murphy and shoe excelled delivering record Q1 sales and demonstrating the benefit of our multi division multichannel operating model.
In addition, we advanced many of the initiatives underlying the strategy that drive value. We continue to grow our digital business and we further strengthen the connections with our consumer who progress on loyalty and customer insight.
As a company we have in the past successfully navigated multiple adverse retail cycles across our businesses with the most recent being the COVID-19 shutdowns in calendar 2020.
As the leading destination for fashion footwear for teens journeys track record of performance, including record sales and profits in the year. Following the shutdown demonstrates the resilience of the business.
Importance of its value proposition to the consumer and the ability to rebound from economic headwinds in fashion shift.
I am confident we will come out on the other side of this environment and an even stronger competitive position.
That said, we are not satisfied with our Q1 performance.
Showing a positive end to the holiday season, our outlook in March assume that this year's normalized spring deliveries would have had a more positive impact against the pronounced negative trend that emerged early in the quarter with our teen customer at journeys.
However, our business did not improve as we change season in the latter half of March and into April .
It's clear that given the dramatic change in consumer sentiment in recent months, we continue to contend with a bumpy post pandemic reset with factors such as inflation lower tax refunds and competitive discounting, particularly in athletic footwear disrupting normal seasonal demand in shopping patterns that.
Bernie.
Consumers continue to stretch their wallets and make harder choices on what to buy or not buy particularly after filling up their closets with our footwear and other offerings earlier in the pandemic.
That said consumers are responding well to newness and seeking more of it and we and our brands are moving quickly to create more newness. After a focused primarily on core product.
Given the pressure journeys is under we are taking significant further action to mitigate the near term environment and consumer shifts.
We're aggressively working to reposition the product assortment at journeys as quickly as possible to meet the customers' appetite for newness.
In addition, we've now identified more than 100 journeys stores for clothing and up to $40 million in cost savings, adding to the targets. We initially laid out.
We're also working harder to rationalize our inventory and making good progress against that Tom will address some of these efforts in more detail.
Despite the challenges in Q1 I'd like to highlight some key accomplishments.
We achieved record top line results for both shoe and J N N highlighting the in depth work, we did to evolve their customer value propositions to set the strategy in both the retail and branded sides of our business and execute well to it.
We grew our comparable digital sales by 7% over last year, while digital penetration grew to 21% of total retail sales versus 19% last year.
And we advanced important strategic initiatives that will help set the stage for a longer term sustainable growth and profitability objectives, which I will discuss further momentarily.
Now moving to our businesses in more detail.
And starting with retail.
The journeys consumer already squeeze by inflation and lower tax refund dollars did not respond to the change of seasons as we had anticipated as we shifted away from boots into spring merchandize, continuing instead to trade down to lower price points and take advantage of the abundance of discounted athletic product elsewhere in the market.
This elevated inventory in the channel continues to suppress demand for other products.
Additionally, with clauses already full we saw lower store traffic and demand for a number of key styles. This year.
As a result journeys did not see the desired sell through in some of its core fashion athletic and casual products.
<unk> countered with reduced receipts of core items and increased promotions and markdowns to clear slower moving noncore. Good taking these actions along with others like returns to vendors to rationalize inventory.
Encouragingly, we saw meaningful shrank for newness in journeys assortment. However, the demand for that product versus our core style was greater than we typically see in a given season.
The core differentiator of the journeys model is its ability to rotate its assortment quicker than competitor given our unparalleled vendor relationships and the team is working diligently to make those adjustments.
This will take some time to execute but should begin to be evident by the back half of the year.
While our store traffic remains challenged our digital business was a bright spot.
<unk> digested the outsize digital growth from the pandemic, we have inflicted to growth again.
Although consumer behavior remains unpredictable in the near term, we're taking extensive efforts to bolster our journeys business, while we weather the current environment. These.
These include working with our brand partners in a bigger way to test new brands and styles.
Tell additional unique brand and product stories and garner even more allocated an exclusive product.
Conducting a much deeper dive on consumer and market insights to better understand current purchase intent and inform our future actions.
Strengthening journeys presence in key marketing channels to drive awareness traffic and sales such as boosting paid search and paid social media investments.
And refining our in store selling approach using input from recently completed time and activities studies, such as adjusting selling tactics promoting use of new technology and tools and stores and Incentivising our store employees to focus further on engaging with customers and driving conversion.
Moving now to schuh the business delivered another quarter of strong double digit comp growth driven by solid increases in both stores and digital with store traffic and average selling prices up.
Shoe continues to benefit from a resilient consumer despite a challenging U K economy.
Operating income improved nicely over last year, driven by stronger gross margins market share gains and it roughly 40% of sales a digital platform that leaves our overall company.
Efforts to improve access to the top brands and styles and reinvigorate its relationship with the customer through marketing and loyalty initiative has resulted in a business operating much more effectively.
These successful efforts inform the playbook for what we're now executing at journeys.
Touching on loyalty in its first year of the total shoe club members now stand at 1.6 million and accounted for 27% of total sales in Q1, well surpassing expectations.
Continuing to capitalize on loyalty remains key to driving market share gains and repeat customer purchases going forward.
Congratulations to the schuh team for driving the business to even greater heights.
Switching to our branded platform Johnston <unk> Murphy remained a bright spot delivering its ninth consecutive quarter of double digit topline growth as well as the strongest gross margin and operating income gains among our businesses.
This record start to the year was driven by strength across all channels digital retail and wholesale as the business continued to capitalize on the long tail of the post pandemic work like.
How's utilization trend.
Jean Ann there's more affluent consumer is proving resilient against the challenging macro backdrop, but most importantly, Jan EMS assortment continues to resonate led by casual.
And the opt in and Amhurst franchises in particular.
Well as major strength in apparel, which grew 35%.
Yeah.
Finally, we are very encouraged by the traction of J N M insiders affinity program, which is now approaching 800000 members.
Not only is it driving stronger customer engagement and higher average transaction size with our existing customer, but nearly two thirds of new customers are joining the program, which should result in better retention and customer value.
I couldn't be more pleased with Jane M success, the teams effort to fundamentally reposition and re imagine the business as a more lifestyle oriented brand in the face of a sea change in wear to work trends is driving outstanding and sustainable results.
And there's a lot of runway ahead of us.
But the product foundation in place, we're now focused on expanding our marketing reach to tell a bigger story and increased Jan EMS awareness as we invest for the next leg of growth.
And finishing out the divisional recap genesco brands groups surpassed our expectations in the quarter, despite going up against a large sell into accounts that were replenishing from supply chain disruption in Q1 last year.
Results were driven by strengthening performance in the value channel and improve gross margins as freight cost is contributing to breakeven operating income.
There's more work to be done Q1 was an encouraging start to the year that we believe should progressed further as headwinds subside over the course of fiscal 'twenty four.
Now I'd like to touch on our outlook.
Given our Q1 results and the lack of visibility into consumer demand, we're taking a much more conservative view for the remainder of this year.
The second quarter is off to a similar start is Q1 for journeys.
Looking forward, even with shopping catalysts like back to school and holiday, we're not planning for a change in the trend.
We anticipate consumers will continue to primarily shop. When there is a reason which will be at a time when our product assortment will also better reflect the newness our customer is craving and we expect some benefit here.
This we're not factoring in a shift in consumer patterns or economic improvement.
Looking at the longer term horizon fundamental to our success in capitalizing on the opportunities ahead of US is executing on the six pillars of our footwear focused strategy the right strategy for moving our business forward.
We've made progress in several areas and while it's still early in the year I'd like to briefly update you on a few of the strategic initiatives we're implementing.
Beginning with journeys loyalty program part of the third pillar of our strategy deepening consumer connections and insights we soft launched journeys all access earlier this month.
Starting in June you'll see a fully launched the program to consumer as we gear up for back to school.
We couldn't be more excited about how this will amplify our connection with our customer as loyalty has done with our other brands.
This platform provides fun and creative ways to connect with our teen customer base and incentivize them to consolidate their branded purchases with journeys as they achieve higher tiers.
With journeys all access rolling out we're also better leveraging our investments in data analytics, and personalization to increase customer retention rates and drive size and frequency of purchases.
Next as we work to accelerate our digital business. The first pillar in our strategy. We continue to ramp up a variety of initiatives that journeys to fuel digital growth back to the double digit rate, we saw both before and during the pandemic.
One example of the steps, we're taking to drive growth is increasing the number of styles available to online consumers.
Year to date, we're up more than 10% versus the same time last year and up 50% versus two years ago, and we're better highlighting the availability of new product releases and launches a product exclusives to journeys.
Following journeys loyalty rollout. We also look forward to the launch of buy online pick up in store at journeys and J N. M. Later, this year, which aligns with our second pillar of maximizing the relationship between our physical and digital channels.
Rolling out our new point of sale hardware and software, including New mobile devices was a foundational step towards enabling both with functionality.
We expect to complete the U S rollout in a few weeks and the Canadian rollout in July .
This represents as much as 20% of shoes online sales and we expect journeys and Jane M to see benefits like this over time.
Earlier. This month, we also completed our receiving automation projects at our largest distribution center, which not only reduces labor costs, but also accelerates how quickly we can make new product available to customers for purchase both in store and online.
In addition, we continue to make progress on moving journeys footprint off mall.
Testing and learning in places such as power centers across multiple markets.
Supported by ramped up marketing campaigns to build awareness, we have so far opened 13 off mall locations out of the 25 pilot stores. We currently have planned.
We still have work to do but we are so far encouraged by the early read and believe this initiative will represent a key element in journeys growth moving forward.
Yeah.
In closing now before handing the call over to Tom I would like to thank all of our people.
Incredible dedication of each of you drives our business forward and it's especially inspiring during challenging times.
Although we faced some near term turbulence I believe in our ability to successfully navigate these dynamics and come out ahead, as we leverage our uniquely positioned retail and branded businesses are.
Our commitment to innovation with our footwear focused strategy and leadership position with journeys and teen fashion footwear.
And with that I'll pass it to you Tom.
Thanks Mimi.
The headwinds faced in journeys had a greater impact on our Q1 financial performance than we anticipated and we are taking more aggressive steps to course, correct and manage our P&L as we move forward.
In the meantime, we remain very pleased with the strength that Jan M and shoe and we're encouraged by the better than expected results.
ESCO brands group.
Turning to our results for the quarter consolidated revenue was 483 million down 7% compared to last year and down 6% on a constant currency basis.
Our total comps were down 5% as strong double digit gains for shoe and Jane M were offset by the negative comp at journeys by.
By channel total store comps were down 8%, while direct comps were up 7% by business Schuh total comps increased 13% Jan M total comps increased 18%.
Journeys total comps were down 14%.
Gross margins were down 100 basis points as compared to last year. The main driver of the year over year change as expected was returned to a more normalized promotional environment at journeys compared to essentially none last year and the decrease beyond expectations was due to the markdowns we took to.
Clear slower moving product given the pressure on journeys topline.
All other businesses improved year over year and exceeded our expectations.
By business journeys gross margin was down 360 basis points.
She was gross margin was up 230 basis points as efforts to improve gross margin and strengthen relationships with key brands continue to gain traction.
<unk> gross margin was up 300 basis points as we lap the airfreight headwinds we experienced a year ago. Finally, genesco brands group gross margin was up 220 basis points as pressure from.
Freight and logistics costs began to ease and due to mix.
Moving down the P&L adjusted SG&A expense was 52% of sales an increase of 550 basis points over last year.
The deleverage is mainly due to the lower sales volumes.
Already typically.
One of our lower volume quarters, given that we are at minimum levels of expenses at this time of the year, making it difficult to drive them lower.
The increased expenses relative to the guidance for largely attributable to variable expenses associated with a higher mix of digital sales as well as some one time expenses and shoe.
On the flip side occupancy cost declined given our initiatives to lower rent expense and close underperforming stores.
Well Sterling salaries, the second largest bucket and operating expenses were only up modestly as our efforts to improve productivity and reduce powers.
To mitigate the legislated increases in minimum wages.
Lowering them, making the occupancy costs more variable in the store channel remains a key priority and we continue to make good progress in Q1, we achieved a 15% reduction in straight line expense.
I'm 37 lease renewals across the company with an average term of approximately three years.
This is in addition to the 237 renewals and 13% rent reduction we achieved in fiscal 'twenty three.
Over 50% of our fleet coming up for renewal in the next couple of years, we have a lot of runway ahead of us to capture more savings.
In light of current traffic and sales trends and general consumer uncertainty.
We have identified over 40 more journeys stores for closure. In addition to the roughly 60, we announced earlier this year.
These are largely mall based locations with more sophisticated consumer information tools. We believe we can recapture lost sales and profits to our online business in nearby stores, while at the same time, reducing our store fixed cost base.
In summary for the first quarter, we incurred an adjusted operating loss of $22 7 million compared to adjusted operating income of $9 5 million for Q1 last year.
This all resulted in an adjusted diluted loss per share of $1.59, which compared to earnings per share of 44 since last year.
<unk> borrowings and interest rates, the lower tax rate and a reduced share count also contributed to the decline.
And the EPS, turning now to capital allocation and the balance sheet. After a year of re inventory and repurchasing another 10% of our outstanding shares we ended the quarter as planned in a net borrowing position.
And we were pleased inventories came in lower than expected.
Quite the pressure on our journeys business, we were able to adjust receipts and ended the quarter with inventories flat to last year and better positioned to invest in the newness trends, we need in our assortment.
The overall increase in inventories was driven by Jane and shoe to support the higher levels of demand in their businesses. We continue to work with our brand partners to adjust our inventory levels and product Assortments and believe inventories will be more in line with last year as we get into the back half we expect to end the year with low.
Our inventories from last year.
Capital expenditures in Q1 were $17 million with investments, primarily directed to our digital and omni channel initiatives and these stores given current trends, we are lowering our full year capex by roughly 10%.
$250 million to $55 million, we opened 12 stores, which were primarily off mall and outlets and closed 26, two in the quarter with 1396 total stores.
Finally, we repurchased 255000 shares during the quarter or 2% of total outstanding shares for $9 2 million, leaving $25 million on our current authorization.
As we've said we're also doing a holistic review of our cost structure.
Connection with our fifth strategic pillar to reshape our cost base.
To that end, we have identified an incremental $15 million of cost savings on top of the $20 million to $25 million reduction we outlined earlier.
Earlier this year with a large portion of the savings hitting the journeys P&L.
We can achieve SG&A savings to further occupancy reductions implementing our time study findings to drive selling salary efficiencies like capitalize on new technology initiatives to drive productivity and procurement efficiencies on overhead.
Finally, as I mentioned, we're working hard to variable is our cost structure further to provide more flexibility to fluctuations in revenue, we expect to realize approximately $20 million of savings in fiscal 'twenty, four and achieve an annualized run rate for the total of up to $40 million.
In fiscal 'twenty five.
Now turning to guidance.
Given the lack of visibility in the consumer environment, we believe it's prudent to adopt a much more cautious view and extrapolate current trends through the balance of the year.
Our outlook for journeys as soon as consumer demand will remain muted as it is thus far year to date, improving only somewhat as we inject more newness into the assortment in the back half, particularly in Q4.
Well this will drive better results in the back half versus the front our expectation on the magnitude of improvement.
It's substantially more conservative than when we last spoke in March we expect schuh and Jane M to perform well.
However, this will not be enough to offset the pressure of journeys.
Taking this into account, we now expect fiscal year 2000, and for total sales decreased 4% to 5% or down 5% to 6%.
Clothing, the 53rd week versus our initial guidance for flat to up 2% for the year.
Take down in sales or the remainder of the year is due primarily the lower expectations for journeys.
With regard to earnings per share, we now expect adjusted earnings per share in the range of $2 to $2 50.
Compared to our prior range of $5.10 to $5.90.
Using the midpoint on our prior range more than half of the reduction is driven by our Q1 actual results versus prior guidance and our assumptions for another earnings per share loss in Q2.
Which I'll outline in a moment.
We continue to expect the 50 <unk> week to add approximately $25 million of sales and have a small negative effect on earnings per share.
However, the flow through on higher sales volumes in the back half.
Allow us to better leverage our fixed costs and generate solid profitability.
Finally, our cost reductions and efforts to reflect newness in our assortment largely benefit Q4 this year.
Such that's where we expect to see the most positive impact to the bottom line and still expect to generate year over year earnings per share growth.
Some color on sales by business compared to last year.
For journeys, we expect a low double digit sales decline.
For Schuh, we expect growth in the high single digit range for Jan M. A double digit rate and for genesco brands modest growth through the remainder of the year. We now expect gross margin rates to be down 30 to 40 basis points compared to our prior view.
For fiscal year 'twenty for gross margins to be up 35 to 45 basis points.
The change in our guidance is being driven by increased markdowns at journeys offsetting the benefit from lower freight and logistics costs and continued margin improvement at shoe and Jane M.
We now expect adjusted SG&A as a percentage of sales to deleverage 170 to 200 basis points compared to our initial expectation of 40 to 70 basis points of deleverage with the cost reduction efforts I described earlier and other actions working to partially offset.
Deleverage on fixed expenses in.
In summary, we expect operating margin to decline versus fiscal 'twenty, three as the macro and industry challenges will offset our near term strategic of our margin expansion and cost savings efforts.
Our guidance assumes no additional share repurchases, which results in fiscal 'twenty for average shares outstanding of approximately 12 million shares and.
And we expect the tax rate to be approximately 25%.
I'd like to now provide some specifics around Q2 to help you with your modeling starting with the topline we expect Q2 sales to be down in a similar range as the first quarter.
Regarding Q2 gross margins, we expect an overall grew.
Most margin decreased to 40 to 50 basis points given additional markdowns, we have built in at journeys to clear inventory.
Is Q2 is also one of our lower volume quarters. The sales decline will result in roughly 460 to 490 basis points of SG&A deleverage, resulting in an earnings per share loss for the quarter of approximately $1.25 at the midpoint.
In closing, we are taking appropriate actions to weather the near term environment and we remain confident that our footwear focused strategy will position us to deliver solid longer term growth and shareholder value.
Operator, we're now ready to open the call for questions.
And at this time, we'll be conducting a question and answer session.
I would 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.
You May press star two if he would like to remove your question from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Mitch <unk> with Seaport Research excuse me.
Proceed with your question.
Yes, thanks for taking my questions I have several so I hope you will indulge me so starting with journeys I guess my first question just big picture Whats kind of the biggest piece that changed to kind of feels like.
You were originally thinking.
Were a drag because of the weather and pricing and once you kind of got through that maybe once you got through the negative impact of tax refunds that things would get better and now it looks like that's not the case. So how does the consumer taken another step down from kind of where where they were in as that.
The biggest piece or maybe you can just elaborate on.
On why the big change on the journeys side.
Mitch Thanks for your question and thanks for joining us this morning, and and that's exactly what we've seen.
We are in a very unusual time and first I want to say is that we have a really good track record of successfully navigating times like this multiple adverse economic cycles and fashion shifts within journeys in the most recent one was that during the.
And store traffic comp.
As we after we completed a expect fall holiday season, we believe that the trend would improve in March for a couple of reasons. One is that we got further away from food that we talked about all kinds of consumers trading down and food and also just really holding back on overall purchases and.
We thought that so switching to spring and a reason to our reward drove into and to buy spring fashion. What also are bringing the consumer and we frankly didn't see the improvement in store traffic the consumer seems to be sitting on the sidelines, it's such a unique time right now because.
There's so many factors that play the economic headwinds that are out there with inflation tax refunds were certainly a a part of it.
I want to underscore how much the excess inventory in the athletic discounting is a factor in the market because.
You know that coupled with the price increases that we and our brands taken across the assortment of just a pivot to the consumer to taking part in what usually isn't marked down and taking part in our in some of that product. So bottom line. There is that we didn't we did not see the pick up in consumer traffic in Perth.
And we think it is prudent to just reflect that in our guidance.
I guess, a few follow ups I'll give you I'll ask them together.
Steel free to have you repeat.
But you mentioned the athletic discounting.
The drag there when do you think that you'll see that and you also talked about the trade down I know that that was an issue with data in particular consumers buying 100 ish dollar menus versus two.
$200 classic calls how does that manifest itself.
<unk> transitioned to spring and do you think maybe you're losing customers to lower tiers of distribution and the trade down and then lastly, just in terms of kind of the change of season.
Is that having a big impact on sandals and do you think its there is some weather component to that that could potentially get better as we get further into the.
The summer so really three follow ups. So one of them you have a lot of discounting one on the trade down and one on the seasonal.
Okay, Great. Let me start with the athletic discounting and you know I think as much as everyone in the industry with anticipating that the athletic discounting would subside by the time, we hit mid year before back to school, we've actually had a number of others within the industry who have announced.
Lee who have said that that discounting will have a will continue through the balance of the year and they've actually built our markdowns and to be able to to affect that clearance and these are really dramatic discounts and it's on good product and it's on product that normally isn't discount it and that's why we think it attract.
A lot of attention I'm going to answer your question around food and the change of season by just talking about about just the fashion cycle that we're in this become much less of our assortment as we as we travel through the first quarter. There you know more than 30% of our mix.
In February and they go down to about 10% in April and so they certainly become less of a factor, but what we're really seeing is that our consumer is sitting on the sidelines when.
When we asked our consumer about you know one of our most recent research at the end of the year about how they feel about journeys, we're still at the top of the league tables in consideration for where can shop, we out for others on being welcoming in pool and fun and having helpful employees.
And so I think that it's really just sitting on the sidelines right now one of the things that I called out is that.
Our consumer is looking for newness, we and our brands gravitated to core product in recent times. It made a lot of sense because it was a safer way to play it when there were so many ups and downs in the consumer cycles and.
Quite frankly, that's what we are what we didn't have when we had supply chain shortages and we felt we we actually saw the demand for this product, but there's a greater appetite for newness and our merchants are journeys merchants have really hustled, they've moved heaven and earth to to chase into some.
This newness and they.
There are some examples.
Exclusive product for journeys that we brought in that sold out that it's just newness and freshness were chasing into product that we were testing and we had good reads on we're shortening the cycle of being able to bring in product we're buying into vials that we saw working last winter.
Hum are clearing out whatever we need to but we're testing a lot of things and bringing in a lot of things and so we think our our chance to be able to effect. This newness is is going to be a little bit during back to school, but certainly within the holiday season, so and sand.
All sales all I'll talk about that for a minute is that you know.
We are.
We have been talking about fashion shifting into casual and are in the fourth quarter. It was the first time in a long time when athletic grew more than casual and we saw that again in the first quarter, but one thing I'd call out on the casual side is that there's a real interest in product that's comfortable it's more.
Our structured that you can slip into part of what we're seeing is this real trend in Cogs.
The trend in Cogs across lots of different brands and it's early for the sandal season, its not really taken off so far but I think that theres a lot of trading into the fog product and into some specific brands. We've had a lot of success with collaborations and.
And you know we are we are seeing that shift through the course of this spring.
Okay and then one final question on on the store closings.
Closings it looks like you now expect 45.
Sure journeys stores at the end of the year could you kind of walk us through kind of what the schedule of getting to that number looks like and its impact on the P&L I know that you're it sounds like youre, hoping to kind of maybe pick up loss sales online, but does that have you know how much of a sales impact do you think that has.
And what does that do to.
The SG&A in particular.
Sure Mitch I'll I'll I'll start and then I'll hand, it over to Tom but you know in response to this.
As he said we are closing them over 100 underperforming journeys stores at this time and we've added to our cost reduction and we really do believe that we're going to position the business well.
Well too.
Sets us up for profitability to improve very quickly.
And materially when sales rebound, but we've identified these are these stores that we intend to close.
And we are with more sophisticated analytics and our real estate tools can and our customer information can drive sales in these other businesses to our other locations and certainly to online where we're having a lot of success and I'm here, we think that.
It doesn't take a lot when you remove the fixed expenses to replace the profitability that we would lose in these stores and will eliminate a lot of fixed expenses and so we think that's gonna be a real positive for the business and I'll hand, it over to Tom to talk about when we think that impact that will impact sales.
And and and overall profitability.
Yeah, Mitch just just to level set here with the information we posted we're gonna be down a net 78 stores for journeys over the course of the year just to level set on that number.
And the ones that were open and are mainly there they're not mall locations. There there are off mall locations plus some premium outlets and we've done very well with.
With premium outlets most of those will be open in time for the back half of the year.
Closures you can see we're making big headway on those early and there are a lot of those will be closed for the back half. So they they have the they have a bigger impact.
In the back half of the year of both the third quarter and the fourth quarter some impact in the second quarter, but the bigger impact on closures is in the third quarter and the fourth quarter, So bigger impact on sales big impact on SG&A, especially in the fourth quarter.
Minimal impact if any on profitability.
In the are these stores that we're closing on average have a lower sell right.
So, they're they're they're they're significantly lower.
Have less of an impact right and average store closure would have.
And our next question comes from the line of Brian <unk>.
<unk> with Jefferies.
Proceed with your question.
Hi, Yes. Thank you this is ryan on for Corey.
I was just curious you know as it relates to this store closing update.
Can you just provide any color on the trends youre seeing in off mall versus in mall locations.
Then just you know what's the current mix between off mall and on mall.
<unk> and how youre thinking about that moving forward. Thanks.
Thanks for joining us this morning, Ryan and I will talk a bit about our off mall strategy.
We are you know primarily.
Primarily located within mall locations right now for journeys are we've got a number of our street locations for shoe a number of airport locations are for for Johnston <unk> Murphy and in general in the journeys portfolio. We also have a lot of outlets, but we don't really.
Bidder that to be off mall, we consider off mall to see more of those power centers and and in locations that are anchored by a different mix.
And so a lot by some of the value channel folks.
A lot of the larger box off mall locations and so this is really a newer and newer initiative for US. We are we in our market research that our consumers have gotten the feedback that our customers go to off mall locations.
Four times per month, and it's part of their of the places that they go.
They enjoy the convenience of shopping closer to home and combined with some of the Omnichannel services that we can offer like curbside pickup and so we've had success with a number of early off mall locations that delivered attractive four wall and that encouraged us to test more and so we are we've opened.
13 of what we expect to open a to B 25 off mall doors and these are with a larger footprint and ability to carry the full assortment of kids and adult what we've seen so far is that they are significantly lower rent expense, which is great for our economic.
We've got a double up early on with our marketing spend so that we can drive traffic and build awareness to know that we're there, but we see that there is a nice amount of conversion within these locations and it puts us in a position to diversify away from from mall.
Really enthusiastic about this growth opportunity and it just gives us the potential of a really a number of best locations for journeys. There are a lot of our peers that are out there. There are some formats that appeal to teens in between and we'd be looking to co locate with them as well.
Okay, Great and then could you just provide some additional information around the loyalty programs at journeys Schuh and Johnston <unk> Murphy any sort of stats you can provide around that.
The typical the typical demographic how member retention or transactions sizes.
Her from non members.
Sure. We are really excited about the soft launch of our journeys all access program, which took place earlier this month and we will be rolling that out in time for back to school, which is which which we think will do.
A lot to drive repeat purchases and also do a lot to them to drive average transaction size and so we launched.
<unk> Johnson Murphy Insider's program.
A couple of years ago, and I talked today on our call about having 800000 members and what we're seeing is that our new members are our new.
New customers are really joining at a very very high rate and we're seeing a higher average transaction size within.
Their purchases on the shoe side, we have just anniversaried, the shoe club, which launched a year ago and we have 1.8 million members. A 1.1 point, sorry, $1 6 million members that we have at it pretty quickly in the U K.
The U K side of the U K is a sense of the size of the U S. So we're pretty pleased by how many we've added and we you know we've seen more purchase frequency within that.
The issue club as well and so we think that overall, our loyalty efforts coupled with all of our efforts on CRM and on personalization are going to drive the ability for us to increase the number of pairs of shoes that our customers buy every year. So we've got lots of teams across our organization.
<unk> working on these initiatives and are excited about the results that we're seeing and also excited about the potential for journeys.
Great. Thank you.
Yeah.
Our next question comes from the line of Mitch comments with Seaport Research. Keith proceed with your question.
Yes. Thank you I have three follow ups.
First Tom on the Guy I got the impression from you.
Comments earlier that maybe the re queue is another loss as far as earnings is that.
Is that what you're essentially.
Guiding to or.
No no not at all.
No no not at all we expect.
Q3, we're going to see some some growth in earnings we've as we've talked about the store closures will have some of the cost savings in Q3 as well journeys.
Journeys will have.
Much lower operating expenses in Q3 as well so we expect relative to the prior year, we expect Q3 to be B b.
From a sales perspective, we do expect Q3 to be down. Some overall, that's really driven by journeys. The rest of the businesses are going to be up.
We do expect to take down relative to the prior guidance journeys gross margins to more to reflect the current environment. What we may do you need to do there they'll have some lower operating expenses, but.
We expect Q3.
Operating income to be fairly fairly comparable to last year's Q3 operating income.
Okay, and then on the on the Genesco brands group.
Believe you said.
Modest growth over the balance of the year I know that Q1 was hurt by the spring order book based on how retailers are ordering products how.
How is the fall order book, they're setting up.
You're still optimistic about that.
We feel good where that order book is heading you know still the general market dynamics or less sort of order book relative to the prior year, but with the traction we saw in the first quarter. We expect going forward will be able to have some modest growth more of that being for fall product more in the third quarter and the fourth quarter.
Our biggest the biggest headwinds we were facing were in the first quarter minutes with the sell in.
That we were anniversarying from last year.
Got it and then lastly, just on the on the inventory it sounds like you're a bit.
Heavy on the journey side.
You mentioned pressure on gross margins not only just lapping the lack of promotion last year, but then also clearing through slow moving product.
When do you think you can have.
I guess, the overall inventory kind of are in the right shape, but particularly the journeys inventory where.
No you won't have like.
Excess product to move through anymore.
Yeah.
Let me Echo <unk> comments on the job. The journeys team has done in terms of working the inventory and changing the assortment and kudos to them and we have great relationships with all the key brands that.
I'm sure you're all familiar with so kudos to them being able to get their hands around the journeys inventory. So as we move through the back half of the year. We do expect some improvement journeys inventory and we certainly expect it to be below last year and when you look at it relative to pre pandemic levels there'll be some.
<unk>, but in the scheme of things fairly fairly small when you consider the cost increases in that inventory relative to pre pre pandemic level. So feel really good about what the team has done they've got a good history of getting their hands around inventory and right sizing. According to the sales trends. So we feel.
Good we're going to end the year with lower inventories than than last year, and we will that certainly will help us generate good cash flow for the year and we're a full price retailer mats we are not.
Going on a promotional.
Ron here.
The comments around first quarter. It was the last quarter that we're having to anniversary essentially no markdowns from last year and so we think that the pressure on gross margins going forward will be less as we go through the year. In addition to that what were adding in terms of additional markdown.
Down.
For journeys is really just to clear the slow moving product.
In response to the consumer environment for core product, our intent isn't to mark down the core products. It's just to manage receipts going forward with the pressure on gross margins should should ease up.
And we have reached the end of the question and answer session and I will now turn the call back over to Boyd Chair, President and CEO Mimi Vaughn for closing remarks.
Thank you for joining us today, we just.
Just wanted to point out again, we've got a great record of successfully navigating challenges like this and we're taking the right actions to respond to the consumer environment and also so to take the appropriate action to be able to drive profitability. As we are as we move forward and sales improved though.
Thank you for your time today and look forward to.
Speaking with you on our next earnings call.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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