Q2 2024 Genesco Inc Earnings Call
Good day, everyone and welcome to Genesco second quarter fiscal 'twenty 'twenty Four conference call. Just a reminder, today's call is being recorded I will now turn the call over to Darryl Macquarie Senior director of S. P. N. A please go ahead sir.
Morning, everyone and thank you for joining us to discuss our second quarter fiscal 'twenty four results.
Participants on the call expect to make forward looking statements, reflecting our expectations as of today, but actual results could be different.
Genesco refers you to this morning's earnings release, and the company's SEC filings, including our most recent 10-K and 10-Q filings for some of the factors that could cause differences from the expectations reflected in the forward looking statements made today.
Participants also expect to refer to certain adjusted financial measures during the call.
All non-GAAP financial measures are reconciled to their GAAP counterparts in the attachments to this morning's press release.
And in schedules available on the company's website and our core earnings.
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 meet.
Thanks, Darryl and good morning, everyone. Thank you for joining up.
Before I discuss our second quarter performance I'd like to take a moment to address the other news we released yesterday the announcement of Mario Galliani. His planned retirement at the end of the fiscal year.
Mario has had an extraordinary 44 year career with Genesco, most recently as president.
Journeys group for the last six years.
His exceptional merchant leadership and footwear expertise has been instrumental in building journeys into the leading teen fashion footwear retailer it is today.
We will all Miss his incredible passion for journeys and for our people and thank him for his extensive contributions to our company.
With Mario working to ensure a smooth transition and Mike fibers recent promotion to journeys Chief operating officer, along with journeys experienced senior leadership I know, we already have a strong team in place as we determine Mario successor.
Now moving to our results.
Although the headwinds pressuring our journeys business persisted as the second quarter progressed and summer kicked in sales trends.
Honestly improved relative to Q1.
Picking up in June and sustaining into July as the back to school season began.
Paired with our other divisions, that's enabled us to deliver our results ahead of our reset expectations. During this lower volume time of the year.
Despite a challenging consumer backdrop, Johnston <unk> Murphy and shoe each delivered another quarter of record sales.
Exceeding our expectations and helping to counter the pressure at journeys.
J N M and shoe are concrete and recent examples of our ability to manage through adverse cycles respond to changing consumer dynamics and come out on the other side in an even stronger competitive position.
And Jane M. In response to the pandemic, we swiftly and effectively repositioned the brand to meet the changing needs of its consumer living in a more comfortable or casual world.
While at Schuh, we evolved its customer value proposition and improved its product access and consumer marketing.
Those efforts have yielded multiple quarters of growth and outperformance for both businesses and now we're similarly, acting with urgency to elevate and evolve journeys.
I am confident we will achieve the same success and value creation as we execute on our strategic plan.
The attorneys consumer remains squeeze biased inflation opting to conserve spending making judicious choices on what to buy and primarily shopping when there is a need or a wanted item to purchase.
Meanwhile, competitive discounting most pronounced in athletic footwear continues to compete for share of wallet and suppressed demand for other products.
On a positive note our consumers' appetite for product newness remains strong and we and our brand partners are moving quickly to inject the journeys assortment with more of these in demand goods.
On our last call we discussed the other immediate actions, we're taking to mitigate the pressure on profits.
We've made good progress on plans to close approximately 100 journey stores and identified $40 million of annual cost savings. We've worked hard to rationalize inventory and successfully drove inventories below last year's levels at the end of the second quarter led by journeys and eliminating the need to agree.
<unk> promote.
We also returned capital to shareholders repurchasing, 8% of outstanding shares during the quarter for a total of 10% this fiscal year.
While these measures will position us well when the consumer environment as the sales recover we are not complacent.
We know we need to take further action to meaningfully accelerate journeys improvement and drive its top line growth.
The foundation of our journeys plan as our footwear focused strategy and its strategic pillars that emphasize continued investment in digital and omni channel deepening consumer insights driving product innovation and reshaping our cost base.
We advanced several strategic initiatives in Q2, including growing our overall comparable digital business by 14% expanding digital penetration to 21% versus 18% a year ago.
We are building on this foundation with a plan to effectively elevate journeys performance going well beyond and also accelerating several initiatives already in place.
Before I speak to those plans in detail I'll touch on the recent highlights for both J N M and shoe.
Starting with Johnston <unk> Murphy, the brand delivered a solid quarter against a tough multiyear comparison.
J M achieved record Q2 sales and at plus 12% its fifth consecutive quarter of double digit comp gains driven by strong growth in our store channel led by higher conversion and average transaction size.
Sales growth would have been even stronger if not for a challenging wholesale business as well.
That's been the case across the industry retailers are exercising caution with their order books, given the uncertainty of the environment versus last year. When many were grappling with low inventory and refilling their pipelines.
Overall, Jane them for sort men continues to really resonate with its more affluent customer base.
The casual and casual athletic categories drove results accounting for almost 90% of the direct to consumer footwear assortment.
The brand continues to see strong growth in apparel and accessories up more than 20% year over year, representing more than 40% of total DTC sales.
Yeah.
As we've discussed before that effort to fundamentally shift J and how this business is driving strong and sustainable results.
With the work done to reposition J N M. As a multi category lifestyle brands Theyre now exist as a significant opportunity to increase <unk> brand awareness, which is low relative to some competitors and change the broad perception that it remains primarily a dress footwear brand.
But we are committed to investing to unlock this untapped market potential and excited about the multi year growth story ahead.
Moving now to Schuh the business had an outstanding quarter marked by 70 teen percent comp growth with solid sequential acceleration as the summer season kicked in and warm weather boosted sales.
Offering a compelling assortment shoe drove robust sandal sales and both increased casual and athletic itself.
And by higher average selling prices.
<unk> delivered record operating income as well as the highest operating margin of all of our businesses led by solid full price sell through.
Strength was broad based across stores and digital with store and web traffic up over last year.
At almost 40% of sales in shoes digital business is the high watermark for the digital acceleration, we're striving to achieve.
Looking at the current quarter. She was back to school season is off to a good start led by the kids business as targeted marketing and bundled promotions have been met with positive response.
The notable momentum of this business over the last several quarters is testament to shoes growing strength and recognition in the market as a fashion footwear destination for the us consumer.
Access to the top brands and products and our relentless focus on customer engagement through marketing and loyalty initiatives has enabled the business to out execute competitors and capture market share despite ongoing economic pressure.
Compared to last year. She moved up to response to ranked number 10 and U K footwear market share in May and June According to Kantar and we believe the business is well positioned for continued share gains moving forward.
Congratulations to the schuh team for this exemplary performance.
Now I'd like to more fully discuss our initiatives at journeys.
Let me start by saying journeys value proposition to customers is intact.
It has driven our successes and separates us from competitors.
The elevate plan is a multi pronged strategy to drive traffic.
And profitability with the goal of delivering not only stronger near term improvement, but also further cementing journeys positioning as the dominant player in teen fashion footwear over the longer term.
The key elements of the plan include number one.
Strengthening customer engagement and expanding relationships with our target team customer, which is key in challenging times is our first priority.
We launched a deep dive on consumer and market insights to build on our expansive knowledge of the team to better understand purchase intent and how behavior has changed post pandemic to shape future actions.
That's part of her engagement efforts and the lead up to back to school, we fully launched journeys all access loyalty program.
While it is early on the initial reads are very promising with a program approaching 1 million members signed up since our full launch in stores two months ago.
We're aiming to interact with customers more frequently driving repeat purchases inducing them to consolidate their branded purchases with journeys to achieve higher loyalty tiers.
Moving forward in Q3, we will expand all access to other rewards specific to some of our top brand partners.
With even more first party data, they're coming in through loyalty sign ups. We're further leveraging our investments in customer analytics and more targeted personalized marketing.
Number two.
Elevating product and strengthening brand relationships, including expanding and adding more differentiation to the assortment and increasing the number of exclusives for journeys and testing new brands and styles.
Here, we're aggressively working to reposition the journeys product assortment to meet the customers' appetite for newness.
But beyond product, we're more fully leverages being the partnerships with our brands.
Elaborating to tell key stories through social media events and other activations to strengthen both the journeys brand.
And the brands of our vendors.
While positioning the repositioning the assortment will take some time.
We already have several top to top meetings with our brand partners and in the process secured greater access to highly allocated in demand styles that allow us to impact the assortment by the back part of this year.
Number three sharpening journeys brand marketing.
These efforts as our insight work told us that when our customers engaged they have a great experience with journeys, but we have an opportunity to build greater awareness with our target consumer.
The partnership with Runup, we launched this past quarter unites our journeys brand purpose messaging with activities to drive Commerce, and addition, and efforts to boost traffic in the back half, we're increasing paid social and paid search spend both of which are delivering positive returns.
Number four implementing incremental initiatives to drive digital and omni channel growth.
We have the opportunity to significantly grow our e-commerce business like we've done at Schuh and are building on our successful initiatives that have driven journeys digital business to double digit growth.
These include increases in digital advertising and leveraging the new loyalty program.
We are especially excited for the imminent launch of buy online pick up in store bonus will be phased in over the next few months beginning in September and rolled out before holiday.
Leverages, our store fleet, while providing consumers with an additional convenient pickup option just in time for the holidays.
Number five.
Optimizing our journeys footprint and driving productivity and efficiency.
While closing underperforming mall stores driving e-commerce and piloting off mall locations are in response to the changing shopping habits of our teen consumer. Our overall objective is to grow journeys revenue and share of market.
Through improving customer data and analytics when closing a store, we're better able to communicate with our customers and direct them to a nearby store or to online to maximize sales recapture.
It's important to note that given the fixed cost we eliminate by closing a weaker performing store, we need very little sales transfer to achieve a breakeven operating income.
Our recently completed time studies to optimize store selling efficiencies will ultimately yield positive results.
Notably driving stronger conversion and the entire productivity per hour as we eliminate excess work and focus more effective selling tactics on peak volume times.
Our new point of sale hardware and software, including in store mobile devices is facilitating further improvement as we deploy this and other technology towards these efforts.
Importantly, I want to underscore again, the conviction I have and our ability to address journeys challenges and achieve success just as we have demonstrated with our other businesses.
With the great talent creativity and dedication of the journeys team its unique strategic positioning as the leading destination for fashion footwear for teens and unparallel strength of its brand relationships.
I believe strongly in our future prospects.
I look forward to keeping you updated on our progress as we continue to refine and evolve this plan and its priorities.
Okay.
Now moving to our outlook.
While we were encouraged to see some pickup in trend in Q2, we believe it's prudent to stay cautious given the lack of visibility into an acceleration in consumer demand for economic improvement.
Thus far in August back to school sales for journeys have improved a little further with consumers, having a reason to shop and shopping much closer to need overall.
Overall, though we're not planning for a major change in trend for the balance of the year.
As I said, we have however move quickly to inject the assortment with more freshness and induce demand goods and expect to see some impact to the back half from these efforts, especially in Q4 during the holidays.
Before I pass the call to Tom I would like to thank our employees for your resilience tremendous efforts and dedication, which makes all the difference navigating challenging times like these.
I'm proud to work with such an inspired group of people.
Our businesses are in strong and differentiated strategic positions and means something to the consumer we.
We have a track record of managing well through adverse cycles and I'm confident that once again, we will succeed.
And with that I'll hand, it over to Tom.
Thanks Mimi.
While the second quarter was challenging and we were encouraged that our profitability came in ahead of our expectations in the current climate, we not only have a solid foundation in place to navigate the current consumer environment.
All but also remain confident that our footwear focused strategy can continue to drive strong results over time.
Turning to our results for the quarter.
<unk> revenue was $523 million down, 2% compared to last year and down 3% on a constant currency basis.
With the stronger result relative to expectations, driven primarily by journeys and schuh.
Well the journeys consumer remain discerning when it came to spending the magnitude of store channel traffic in sales decline.
Improved versus Q1 and.
In our digital business saw a nice acceleration in year over year growth, increasing double digits with particular strength in July is back to school approached.
Our total comps were down 2% as strong double digit gains for shoe and Jane and then were offset by the negative comps at journeys.
Channel total store comps were down 6%, while direct comps were up 14%.
But business Schuh total comps increased 17%.
Jan and total comps increased 12%.
Journeys total comps were down 11%.
Overall gross margin was up 20 basis points as compared to last year.
Although journeys gross margin decline.
Decrease was less than anticipated.
It was more than offset by improvements in all our other businesses.
As compared to last year journeys gross margin was primarily driven by incremental markdowns to clear product in the current environment.
We were pleased with the improvement in our other businesses as our initiatives to expand gross margin continued to gain traction.
But business journeys gross margin was down 100 basis points.
<unk> gross margin was up 280 basis points.
The division benefited from an elevated product mix.
Horton and reduced duties as a result of adding an Ireland based distribution center.
<unk> gross margin was up 60 basis points as airfreight tailwind is better.
Mix more than offset higher markdowns closeouts.
Finally, genesco brands group's gross margin surpassed our expectations in the quarter of 500 basis points.
Stronger operating and supply chain efficiencies to coal.
And the division benefited from price increases.
And a product mix shift.
Moving down the P&L adjusted SG&A expense was 49, 6% sales.
It increased to 400 basis points over last year.
Given that we are minimum levels of expenses at this lower volume time of year.
Difficult to drive them any lower in response to sales, particularly.
As it pertains to selling salaries.
In addition, we are experiencing the hourly wage pressures, while our tons studies have yielded valuable insights.
Converting them into store selling efficiencies is only beginning to take hold.
As a result, we incurred higher than expected selling salaries.
In addition, we recorded higher expenses to drive our technology initiatives as well as increased expenses in our <unk>.
Visions that are growing.
However, the deleverage would not have been as steep headwind not reversed approximately $5 million of incentive comp expense last year.
Excluding the incentive comp comparison.
<unk> expenses Deleveraged 310 basis points when also adjusted for the incentive comp comparison.
Journeys expenses were relatively flat on a dollar basis to last year.
Love boring and overall occupancy cost and reducing the amount of fixed expense in the store channel remains a key priority and we continue to make good progress in Q2, we achieved a 15% reduction in straight line rent expense.
On 59 lease renewals across the company.
With an average term of approximately three years.
This brings our year to date renewals to 96.
Over 50% of our fleet coming up for renewal in the next couple of years.
We have a lot of opportunity to capture additional savings.
Summary for the second quarter.
Incurred a better than expected adjusted operating loss of $10 million.
<unk> adjusted operating income of $10 million for Q2 last year.
So resulted in an adjusted diluted loss per share of 85 cents for the quarter.
Which compared to earnings per share of 59 since last year.
Interest expense.
And a reduced share count also contributed to the decline.
Yes.
Now to capital allocation of the balance sheet, we ended the quarter as planned and a net borrowing position. We're pleased inventories were well controlled down 3% to last year.
Achieving our goal goal to be below last year's levels with.
With respect to journey specifically.
We're able to adjust receipts and ended the quarter with inventory is 15% lower than last year.
Better positioned to invest on the newness trends, we need in the assortment.
And shoe inventories grew compared to last year to support the higher levels of demand in their businesses.
We'll continue to work with our brand partners to manage our inventory levels and adjust our product assortments to the back half of the year.
Capital expenditures in Q2 were $18 million with investments, primarily directed toward digital our omnichannel initiatives and new stores.
We opened 10 stores, which were primarily off mall and outlets.
And close 30 ones in the quarter with 1375 total stores finally, we repurchased 1 million shares during the quarter or 8% of total outstanding shares for $23 million.
$52 million under our current authorization.
To Holistically review, our cost structure, and we continue to anticipate she's an annualized run rate of up to $40 million in cost savings.
In fiscal 'twenty five.
Ultimately 20 million of which will be realized in fiscal 'twenty four.
We're also shifting more fixed costs to be variable.
By decreasing our sensitivity.
Two revenue swings during times of economic turbulence.
These actions to shore up our cost structure are designed to maximize operating leverage and provide a meaningful lift in operating income and EPS growth with sales rebound.
Regarding store closures, we've close 54 journeys stores through the end of Q2.
Roughly 5% of the total fleet.
We're largely mall based locations.
To help you think about the positive impacts our P&L savings from 100 journey stores, we've targeted to close eliminates roughly.
$25 million in costs from SG&A expense, which will mainly benefit fiscal 'twenty five.
This is in addition to the $40 million of annualized run rate cost savings and as maybe mentioned, we only need to recapture the small portion of those lost sales digitally.
We're reviewing nearby store.
But net neutral effect on operating income.
Now turning to guidance, although Q2 results were better than we initially expected the consumer environment remains uncertain.
As such we believe it's prudent to retain or cautious view.
For fiscal 'twenty, four and not assume a significant change.
Current sales trends through the balance of the year.
We continue to expect that the challenging journeys consumer and while we expect schuh and Jan him to continue continue performing well.
We're seeing some continued pressure in Q3 and the wholesale channel.
<unk> side.
Even with our cost reduction initiatives, we anticipate some of the escalating cost pressures we experienced in Q2 to continue in the back half, particularly Q3 and.
In addition, we shifted some marketing expense.
Out of Q2 and into Q3.
These factors are offsetting the better than expected earnings per share, we realized in Q2, and leading us to maintain our full year outlook for adjusted earnings per share of $2 to $2.50 with expectations for earnings to be near the midpoint of this range.
For the full year, we now expect total sales to decrease 2% to 4% were down 3% to 5%, excluding the 50 <unk> week.
This improvement versus our prior guidance, primarily reflects our actual Q2 sales results.
But also factors in an improvement shoe.
We continue to expect the third 50 <unk> week to add approximately.
$25 million of sales and have a small negative effect.
On earnings per share.
Some color on the total year end sales by business compared to last year.
For journeys, we now expect a high single digit decline.
For Schuh, we now expect growth in the low double digit range.
<unk> seen the strong trends in the business for Jan M. We continue to expect a low.
Double digit growth rate for genesco brands modest growth in the back half.
With a slight.
Decline in Q3 offset by growth in Q4.
We now expect gross margin rates to be flat to down 20 basis points compared to our prior to view.
For fiscal year 'twenty for gross margins to be down 30 to 40 basis points.
The change in our guidance is being driven by our Q2 actual results.
Some improvement at journeys in the fourth quarter as more newness flows into the assortment.
We now expect adjusted SG&A as a percentage of sales to deleverage 220 to 240 basis points compared to our prior expectation.
A 170 to 200 basis points of deleverage.
This is largely driven by increased wages and other cost pressures.
Quite this pressure journeys expenses are expected to decline in the back half.
Our fiscal year 'twenty four is cost savings measures and store closures to take hold.
Our guidance assumes no additional share repurchases.
Which results in fiscal 'twenty for average shares outstanding.
$11 4 million and we expect the tax rate to be approximately 24%.
I'd like to now provide some color around Q3.
Starting with the topline, we expect Q3 sales to be down low single digits or a similar percentage as the second quarter.
With respect to Q3 gross margins, we expect an overall gross margin decrease of 50 to 70 basis points.
Incremental markdowns, we have built in at journeys to ensure clean inventory.
Well as lower margins that Jan M due to product mix shift and higher Mark downs against last years extremely lean inventories rigor.
Regarding expenses with additional pressure on selling salaries and other cost inflation, we expect roughly 130 to one.
170 basis points of overall S.
SG&A deleverage in Q3.
Finally for Q3, we expect approximately $2 million of interest expense of 24% tax rate and a share count of $11 million.
Summary, we continue to position ourselves to weather the current consumer headwinds, while simultaneously, creating a leaner and more nimble organization that is better equipped to capitalize and deliver even greater shareholder value once the tide turns.
Operator, we're now ready to open the call for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star key.
Our first question is from Mitch commence with Seaport Global Securities. Please proceed.
Yes, thanks for taking my questions I guess I have several while I'll skip to your DAU and then jump back into the queue maybe on the on the journeys business you referenced sequential improvement both in the press release and on the call today.
Or any way you can you can.
And I guess that's continued into August can you quantify that I mean are we are we like.
I mean did you get that like down mid single by August through kind of where you know just maybe go through that.
Well, Matt. Thank you for your question and we are we were pleased to see improvement overall in the journeys business and I'll, just remind you that the journeys comp and the first quarter was down.
14% in the second quarter, we saw that improvement to down 11% and really as I said on our last call. When we got into may be the key.
For me it was pretty much reflective of what we were seeing in the first quarter. The summer was off to a very slow start and we didn't see it pick up until June but they picked up nicely in June and really picked up in July to being down in the high single digits are running down around 9%.
And that really carry through into into August and so we've seen that movement from down 14 to down 11 to down nine.
Okay.
And then.
It just sounds like us.
From a product standpoint, I know last call you talked about and I think the last couple of calls you've talked about kind of a shift away from casual more towards what I think last call you talked about strength in clogs can you just give us an update in terms of what you are seeing that.
Or are there there's been some bouncing around Mitch in terms of product, but in general what we saw in what I described coming out of the pandemic is that our customers our team customers gravitated toward what we call the cash on cash.
Actual side.
First is fashion athletic and our team always has a huge compliment of fashion athletic in their closet as what they were on a day to day basis, but fashion Swan much more to casual driven by purchases of more sandals more boots more shoes versus what we call fashion.
And and ups and downs, we're still seeing the strength within within the casual side.
In terms of what customers are buying and I've described before is that if you go back to I could go back to winter, we saw a lot of trading down from toll booths into shorter bids what our teams are liking is like for like product, but a little bit more more structure. So.
Hogs and I've talked about as well there are a number of different brands that are representing the clog style and design.
That's a nice trend that we are seeing we are actually getting some early reads on fall product interestingly, it's still it's still quite hot in many parts of the United States and but we are seeing that there are some more interest and more appetite in products for the fall and so I think in general.
The consumer has been sitting on the sidelines, they've been picking and choosing what they wanted to buy but the and I've talked a lot about the appetite for newness, which is is driving what our consumer purchase behavior is is responding to more than anything else and so that appetite for newness we have seen.
<unk> laid into appetite for more fall and winter type product. Despite the fact that it's still it's still summertime.
And then on Hu.
Obviously that business is trending very well you referenced some market share gain there.
I guess I'm curious.
How much of this is.
You talked about kind of a better assortment how much of this is.
What the assortment is that much better or maybe the consumer in the U K is stronger the competitive landscape has changed more there than here.
Maybe parse that out a little bit more.
Yes, there are lots of dynamics within the U K market shoes business has performed just remarkably well in the face of pretty extreme headwinds there was a lot of.
A change in the consumer and the retail landscape there were a lot of retail store closures and the like but that's largely behind us and we're measuring them against a market that has stabilized from the point of retail store closures and so against the backdrop of a.
Consumer environment in terms of inflation being high in terms of just overall spending power on the part of consumer the consumer being competed away shoe is out shining competition and truly just taking market share and so the measurement of market share is that the compelling assortments that she was.
Offering the great service within stores.
Terrific abilities on the website is a that the.
The amplified marketing and the specific marketing to the consumer is resonating and working really well. So it's a combination of lots of factors. In addition to access to more and better of our allocated product.
That's what's working well and that's been a pretty remarkable move up to number 10 are in the in the overall market and that's a little bit of a three three places overall. So it is a gaining of market share because of how well that team has has created strategies to go after the market and how affirm.
They've executed.
Okay, and then one more and I'll get into.
Back in the queue.
You mentioned some of the challenges around wholesale.
You referenced some weakness, Virginia in EM and <unk>.
Quarter.
And also have you changed in your outlook for the back half can you say what Jane M. Wholesale was in the quarter and then can you maybe just again a little bit more color in terms of how you're thinking about wholesale whether it's virginia them or or.
The other brands for the back out.
But the way to think about that matches that.
One way you can get to it because we didn't break it out specifically is that Jane EMS comps and that's really retail stores and E Commerce were plus 12% and the growth in sales overall for the business was up 4%. So you can get a measure of the.
The overall wholesale headwinds there and you know what with what we're seeing and I think what many in the industry are talking about is that.
Given the consumer environment.
Our our wholesale customers that as our retail partners are just being very conservative and right now the number one thing is to keep inventories clean and even when and to keep them low and even when product is selling through nicely as it is evidenced by the great sell through in our direct channel or.
Partners are being cautious and I think that they just tower coming off of a huge.
Huge bulge of inventory and want to make sure that they are able to keep inventories in line and so those tend to be really pronouncements across the board.
In spite of our sell throughs, great sell throughs within particular brands and so we have seen that in general on the branded side of our business and have reflected that into our overall guidance for the back part of the year.
Okay. Thanks, I'll get back in the queue.
Thank you.
Our next question is from Corey Karla with Jefferies. Please proceed.
Great. Thanks.
I was wondering if you could talk about some of them into them that you've seen at Johnston <unk> Murphy Ah you mentioned that comps were up fairly strongly so would be great. If you could just double click into what's driving that momentum and what you expect to head up the division.
Alright. Thank you for that question, we're very excited about our prospects for Jan am at one of the most exciting opportunities for growth within our company and I'm very much aligned with our strategy to grow the branded side of our business.
What we what we did what that team did and is being really hard hit during the pandemic was to pay that much harder into casual and into comfort and it's great product with great styling, but also with special technical features are with proprietary chassis systems and waterproofing.
Features that smart moisture wicking technology, and we've been investing a lot in the product and so it's a comfortable product. It's a product that's really filled with great features and it's much more casual than in prior times, we have been focused on a shift into casual might mean trading down avid.
Selling prices for our footwear, but because we have built in technology, we're actually able to achieve pretty similar our overall pricing for more casual product and in addition to that.
The team has done a quite a tremendous job of proliferating categories and building. These technical features into the apparel and accessories and so I talked about our overall apparel and accessories sales being up 20% are they now comprise overall, 40% of our direct to consumer.
Sales and so in general our customer really likes what they're seeing they're seeing an opportunity to byproduct that doesn't that they have in their closets right now and it's just fantastic when you put on the shoes you put on the apparel. It is so comfortable it is so so but looking and so there's opportunities for.
Further expansion into other categories expansion of.
Ah into Blazers had been doing really well this season we.
We have expanded into our boys business as well and we think right now the opportunity is to build brand awareness our customers like what they were seeing some of them are more recent research has said that we have opportunities to drive further awareness and and that's what our that's what we're intending to.
I do.
Great. Thanks, that's very helpful. And then just secondly on inventory it seems like you've made some really nice progress there.
Could you maybe talk about how you expect inventories to trend throughout the rest of this year.
And maybe the associated impact on margin it seems like your inventories maybe even be in a better place than the industry more broadly so curious.
Just to get a sense for where you're at on that journey.
Yeah. Cory this is Tom good question, we're really pleased with what we've been able to do with our with our inventories.
The journeys group continues to have strong relationships with all of its key vendors and those vendors work and.
And the merchandising team works very closely with those key vendors, making sure we have the right product at the right time and the appropriate inventory balance so we can.
Mitigate.
So for.
In terms of trends going forward you saw just the overall inventory was down.
2% to 3% at the end of the second quarter, we expect to even continue to improve on that for the third quarter and the fourth quarter and journey specifically saw was down at the end of the second quarter of 15%.
We expect a similar kind of results in the third quarter.
Fourth quarter, so really pleased with that and I think in terms of how that impacts margins going forward.
Feel a little bit more bullish in the fourth quarter on journeys margin as a result of that because we're going to end the year with an inventory position.
Was much more of their current relevant product, that's selling well vis vis a year ago. So.
Through really good what we've done with the inventory we've got continued processes in place.
Drive the business is driving the continued to watch inventories going forward now, which will help with the margins as well.
As Tom said, our merchants have done a great job of managing inventory, but what's so good about this is it gives us lots of flexibility to chase into the newness that I've been talking about we in fact had been able to do that and so we've got ultimate flexibility to be able to bring in the product we need to be able to drive that business.
Great. Thank you so much for all the color and best of luck.
Thank you.
We now have a follow up question from niche commence with seaport Global. Please proceed.
Yeah. Thank you I've got another handful so I hope you'll indulge me.
The journeys <unk>.
Guide for the year it looks like it improved from down low doubles to down high singles.
So can you kind of walk through sort of what's implied for the back half of the year. I mean are you looking at like sort of down high singles and <unk> down mid singles in Q4 is that kind of trajectory that you think that business is on.
Let me talk generally about that and let Tom let Tom be able to weigh in but specifically the approach that we have taken is that we believe it's prudent to just keep extrapolating. The current trend Mitch so theres been a little bit of pick up in the current trend and so we're incorporating that into.
So our overall thinking, but we're not anticipating that there is gonna be a big pick up in the consumer market. We're not expecting that that is that you know any any major economic improvement.
Or decline in the back part of the year, we're just extrapolating out the trend what we are doing though is we are building in this newness that I keep talking about in the past that is resonating with our consumer and that's what is driving our overall our overall pick up it is product driven.
By gaining access to product that we have a good degree of confidence that we will sell through and so that's our that's the general approach that we've taken and I'll I'll turn it over to Tom to give you any more any more color there.
In the third quarter were really same expectations as we had.
Three months ago for the third quarter sort of down relative to the prior year of high single digits low to low double digits, and then the fourth quarter pretty similar expectations as well, maybe a slight improvement based on some improvement newness, but really nothing of significance relative you know essentially.
Pretty much in line with the prior expectations of booked in third quarter and the fourth quarter.
Okay, and then maybe just to clarify something you said earlier and reconcile that with your prepared remarks, I think you said the job wide journeys comp was minus nine and I thought you said in your prepared remarks that August was better than July and and journeys does that is that the case was August .
Other than a minus nine.
Yeah, well I think what I was referencing in my prepared remarks, Mitch was the pick up from the second quarter into the third quarter and so really it was the going from the down 11 in the second quarter, which of course had sequential improvement into overall improvement into August .
Okay.
And then you mentioned the confidence that you have in the newness in your prepared remarks, you also talked about some of the challenges around.
Inventory overhang or have you seen any improvement there or are you anticipating less of a drag from that on journeys as we go through the balance of the year.
Yeah.
We have been talking for several quarters at this point about the athletic overhang.
Really within the industry and not within the product that we are selling.
Initially I think everybody was anticipating that this overhang would be cleared up by back to school and then the goalpost shifted out until the end of the year and what we are seeing out in the marketplace and what we're hearing from.
Other competitors and the like is that a the overhang is still out there and it will linger or certainly through the back part of the year and that's incorporated within our overall thinking and we were anticipating that are that by the end of the year, we hopefully that the industry can really move past some of this but it is.
It's still existing today and the markdowns are still being taken pretty significantly you're not seeing that that degree of markdown within that that's not a specific factor of that is that that is affecting our business, but what it is doing is it's depressing demand for some of the athletic product that we're selling because of the deals that are out there on.
Really.
Very good product is a is pretty attractive.
Okay, and then just a couple last one Tom on the.
On the journeys stores and you're closing a bunch of stores do you have a.
Our store count for journeys at year end.
Yeah.
Yeah.
I do.
Yeah.
Yeah.
Uh huh.
I've got kind of a separate one for you Tom.
The $40 million of cost savings it sounds like $20 million of that is being realized this year.
Could you, maybe just kind of walk us through the phasing of that by quarter and we already started to see some of that in the first half of the second quarter and how does that kind of play out over the next couple of quarters.
That's it for me.
This is the first question projected journeys store count is 1057.
At the end of the year.
Okay. Thank you.
And then.
Yeah.
Yeah.
On the cost savings.
Yeah in terms of cost savings match most of the costs will still be in the fourth quarter there'll be some some in the third quarter, but most of it is still driven in the fourth quarter and we're still confident still feel confident about what we are.
We're doing it from that perspective.
In addition to what we did.
As we talked about we do have a lot of initiatives in place relative to selling salaries and we're losing a lot.
Your hours relative to the prior year and selling salaries same time some of the traction.
Traction, we're getting in terms of reducing those salaries is not what we originally expected but.
Continue to work on that we still we will still continue to yield some selling salaries.
Savings, we also still have some good initiatives in place outside of selling salaries are dumped continue to double down on our occupancy costs going forward.
Got some initiatives in the branded group as well in terms of what we can do to reduce our expenses there and.
And we also have some procurement initiatives in place relative to outside spend that we'll continue to work on that and then we've also have some good visibility and line of sight of what additional cost savings. We will look for for next year as well pretty similar categories for next year as well so.
Good good line of sight on that good confidence that we'll achieve that.
And again to the original question Theres more of it in the fourth quarter.
I think another thing just to point out in the fourth quarter that is this year the journeys fourth quarter expenses absorb a 50 <unk> week of expenses as well so when you adjust for that.
Just for a full year of the Opex impact for store closings in the next year, you really start seeing the opportunity. We have here with you know a reset cost base.
And you start thinking about.
Sort of modest expectations for the other parts of the business from a sales growth and a margin perspective.
Relative to the success, we've seen there so modest expectations on the other divisions, given a modest comp improvement with journeys going forward into next year and with what we've done over the last 12 months, we bought back 13% our share as you can see a lot of earnings per share leverage next year.
This does conclude the question and answer session.
I would like to hand, it back to management for closing comments.
Thank you for joining us today, and we look forward to talking to you on our next quarterly call.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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Good day, everyone and welcome to Genesco second clutter.
Goal 2020 for a conference call. Just a reminder, today's call is being recorded I will now turn the call over to Darryl Macquarie Senior director of S. P. N. A please go ahead sir.
Good morning, everyone and thank you for joining us to discuss our second quarter fiscal 'twenty results.
Participants on the call expect to make forward looking statements, reflecting our expectations as of today, but actual results could be different.
Genesco refers you to this morning's earnings release, and the company's SEC filings, including our most recent 10-K and 10-Q filings for some of the factors that could cause differences from the expectations reflected in the forward looking statements made today.
Participants also expect to refer to certain adjusted financial measures during the call.
All non-GAAP financial measures are reconciled to their GAAP counterparts in the attachments to this morning's press release.
And in schedules available on the company's website and our core earnings.
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 meet.
Thanks, Darryl and good morning, everyone. Thank you for joining up.
Before I discuss our second quarter performance I'd like to take a moment to address the other news we released yesterday the announcement of Mario Galliani. His planned retirement at the end of the fiscal year.
Mario has had an extraordinary 44 year career with Genesco, most recently as president of the journeys group for the last six years.
His exceptional merchant leadership and footwear expertise has been instrumental in building journey into the leading teen fashion footwear retailer it is today.
We will all Miss his incredible passion for journeys and for our people and thank him for his extensive contributions to our company.
With Mario working to ensure a smooth transition and Mike <unk> recent promotion to journeys Chief operating officer, along with journeys experienced senior leadership I know, we already have a strong team in place as we determine Mario successor.
Now moving to our results.
Although the headwinds pressuring our journeys business persisted as the second quarter progressed and summer kicked in sales trends.
Honestly improved relative to Q1.
Picking up in June and sustaining into July as the back to school season began.
Paired with our other divisions, that's enabled us to deliver results ahead of our reset expectations. During this lower volume time of the year.
Despite a challenging consumer backdrop, Johnston <unk> Murphy and shoe each delivered another quarter of record sales.
Exceeding our expectations and helping to counter the pressure at journeys.
Jan Evan Zhou our concrete and recent examples of our ability to manage through adverse cycles respond to changing consumer dynamics and come out on the other side and an even stronger competitive position.
And Joanne am in response to the pandemic, we swiftly and effectively repositioned the brand to meet the changing needs of its consumer living in a more comfortable or casual world.
While at Schuh, we evolved its customer value proposition and improved its product access and consumer marketing.
Those efforts have yielded multiple quarters of growth and outperformance for both businesses.
And now we're similarly, acting with urgency to elevate and evolve journey.
I am confident we will achieve the same success and value creation as we execute on our strategic plan.
The attorneys consumer remains squeeze biased inflation opting to conserve spending making judicious choices on what to buy and primarily shopping when there's a need or a wanted item to purchase.
Meanwhile, competitive discounting most pronounced in athletic footwear continues to compete for share of wallet of suppressed demand for other products.
On a positive note our consumers' appetite for product newness remains strong and we and our brand partners are moving quickly to inject the journeys assortment with more of these in demand goods.
On our last call we discussed the other immediate actions, we're taking to mitigate the pressure on profits. We've made good progress on plans to close approximately 100 journey stores and identified $40 million of annual cost savings, we've worked hard to rationalize inventory and successfully drove it.
Inventories below last year's levels at the end of the second quarter led by journeys and eliminating the need to aggressively promote.
We also returned capital to shareholders repurchasing, 8% of outstanding shares during the quarter for a total of 10% this fiscal year.
While these measures will position us well when the consumer environment as sales recover we're not complacent we.
We know we need to take further action to meaningfully accelerate journeys improvement and drive its top line growth.
The foundation of our journeys plan as our footwear focused strategy and its strategic pillars that emphasize continued investment in digital and omni channel deepening consumer insights driving product innovation and reshaping our cost base.
We advanced several strategic initiatives in Q2, including growing our overall comparable digital business by 14% expanding digital penetration to 21% versus 18% a year ago.
We are building all this foundation with a plan to effectively elevate journeys performance going well beyond and also accelerating several initiatives already in place.
Before I speak to those plans in detail I'll touch on the recent highlights for both J N M and shoe.
Starting with Johnston <unk> Murphy, the brand delivered a solid quarter against a tough multiyear comparison.
Jane M achieved record Q2 sales and at plus 12% its fifth consecutive quarter of double digit comp gains driven by strong growth in our store channel led by higher conversion and average transaction size.
Sales growth would have been even stronger if not for a challenging wholesale business.
That's been the case across the industry retailers are exercising caution with their order books, given the uncertainty of the environment versus last year. When many were grappling with low inventory and refilling their pipelines.
Overall, Jane <unk> continues to really resonate with its more affluent customer base.
The casual and casual athletic categories drove results accounting for almost 90% of the direct to consumer footwear assortment.
The brand continues to see strong growth in apparel and accessories up more than 20% year over year, representing more than 40% of total DTC sales.
As we've discussed before that effort to fundamentally shift J and EMS business is driving strong and sustainable results, where the work done to reposition J N M. As a multi category lifestyle brands Theyre now exist as a significant opportunity to increase <unk> brand awareness, which is below realm.
<unk> to some competitors and change the broad perception that it remains primarily a dress footwear brand.
But we are committed to investing to unlock this untapped market potential and excited about the multi year growth story ahead.
Moving now to Schuh the business had an outstanding quarter marked by 70 teen percent comp growth with solid sequential acceleration as the summer season kicked in and warm weather boosted sales.
Offering a compelling assortment shoe drove robust sandal sales and both increased casual and athletic sales aided by higher average selling prices.
Sure delivered record operating income as well as the highest operating margin of all our businesses led by solid full price sell through.
Strength was broad based across stores and digital with store and web traffic up over last year.
And almost 40% of sales of shoes digital business is the high watermark for the digital acceleration, we're striving to achieve.
Looking at the current quarter. She was back to school season is off to a good start led by the kids business as targeted marketing and bundled promotions have been met with positive response.
The notable momentum of this business over the last several quarters is testament to shoes growing strength and recognition in the market as a fashion footwear destination for the youth consumer.
Access to the top brands and products and our relentless focus on customer engagement through marketing and loyalty initiatives has enabled the business to out execute competitors and capture market share despite ongoing economic pressure.
Compared to last year, she moved up three spots to ranked number 10 and U K footwear market share in May and June According to Kantar and we believe the business is well positioned for continued share gains moving forward.
Congratulations to the schuh team for this exemplary performance.
Now I'd like to more fully discuss our initiatives at journeys.
Let me start by saying journeys value proposition to customers is intact.
It has driven our success as it separates us from competitors.
The elevate plan is a multi pronged strategy to drive traffic.
And profitability with the goal of delivering not only stronger near term improvement, but also further cementing journeys positioning as the dominant player in teen fashion footwear over the longer term.
The key elements of the plan include number one.
Strengthening customer engagement and expanding relationships with our target team customer, which is key in challenging times and is our first priority.
We launched a deep dive on consumer and market insights to build on our expansive knowledge of the team to better understand purchase intent and how behavior has changed post pandemic to shape future actions.
As part of her engagement efforts are in the lead up to back to school, we fully launched journeys all access loyalty program.
While it is early on the initial reads are very promising with a program approaching 1 million members signed up since our full launch in stores two months ago.
We're aiming to interact with customers more frequently driving repeat purchases inducing them to consolidate their branded purchases with journeys to achieve higher loyalty tiers.
Moving forward in Q3, we will expand all access to other rewards specific to some of our top brand partners.
With even more first party data they are coming in through loyalty sign ups. We're further leveraging our investments in customer analytics and more targeted personalized marketing.
Number two elevating product and strengthening brand relationships, including expanding and adding more differentiation to the assortment and increasing the number of exclusives for journeys and testing new brands and styles.
Here, we're aggressively working to reposition the journeys product assortment to meet the customers' appetite for newness.
But beyond product, we're more fully leverages being the partnerships with our brands.
Elaborating to tell key stories through social media events and other activations to strengthen both the journeys brand.
And the brands of our vendors.
While positioning the repositioning the assortment will take some time.
We already have several top to top meetings with our brand partners and in the process secured greater access to highly allocated in demand styles that allow us to impact the assortment by the back part of this year.
Number three sharpening journeys brand marketing where.
These efforts as our insight work told us that when our customers engaged they have a great experience with journeys, but we have an opportunity to build greater awareness with our target consumer.
The partnership with <unk>, we launched this past quarter unites our journeys brand purpose messaging with activities to drive Commerce, and addition, and efforts to boost traffic in the back half, we're increasing paid social and paid search spend both of which are delivering positive returns.
Number four implementing incremental initiatives to drive digital and omni channel growth.
We have the opportunity to significantly grow our e-commerce business like we've done at Schuh and are building on our successful initiatives that have driven journey digital business to double digit growth.
These include increases in digital advertising and leveraging the new loyalty program.
We are especially excited for the imminent launch of buy online pickup in store focus will be phased in over the next few months beginning in September and rolled out before holiday.
This leverages our store fleet, while providing consumers with an additional convenient pickup option just in time for the holidays.
Number five.
Optimizing our journeys footprint and driving productivity and efficiency.
While closing underperforming mall stores driving e-commerce and piloting off mall locations are in response to the changing shopping habits of our teen consumer. Our overall objective is to grow journeys revenue and share of market.
Through improving customer data and analytics when closing a store, we're better able to communicate with our customers and direct them to a nearby store or to online to maximize sales recapture.
It's important to note that given the fixed cost we eliminate by closing a weaker performing store, we need very little sales transfer to achieve a breakeven operating income.
Our recently completed time studies to optimize store selling efficiencies will ultimately yield positive results, notably driving stronger conversion as higher productivity per hour as we eliminate excess work and focus more effective selling tactics on peak volume times.
Our new point of sale hardware and software, including in store mobile devices is facilitating further improvement as we deploy this and other technology towards these efforts.
Importantly, I want to underscore again, the conviction I have and our ability to address journeys challenges and achieve success just as we have demonstrated with our other businesses with.
With the great talent creativity and dedication of the journeys team.
Its unique strategic positioning as the leading destination for fashion footwear for teens and unparallel strength of its brand relationships.
I believe strongly in our future prospects.
I look forward to keeping you updated on our progress as we continue to refine and evolve this plan and its priorities.
Okay.
Now moving to our outlook.
While we were encouraged to see some pickup in trend in Q2, we believe it's prudent to stay cautious given the lack of visibility into an acceleration in consumer demand or economic improvement.
Thus far in August back to school sales for journeys have improved a little further with consumers, having a reason to shop and shopping much closer to need overall.
Overall, though we're not planning for a major change in trend for the balance of the year.
As I said, we have however move quickly to inject the assortment with more freshness and induce demand goods and expect to see some impact through the back half from these efforts, especially in Q4 during the holidays.
Before I pass the call to Tom I would like to thank our employees for your resilience tremendous efforts and dedication, which makes all the difference navigating challenging times like these.
I'm proud to work with such an inspired group of people.
Our businesses are in strong and differentiated strategic positions and means something to the consumer we.
We have a track record of managing well through adverse cycles and I'm confident that once again, we will succeed.
And with that I'll hand, it over to Tom.
Thanks Mary.
While the second quarter was challenging and we were encouraged that our profitability came in ahead of our expectations in the current climate, we not only have a solid foundation in place to navigate the current consumer environment.
But also remain confident that our footwear focused strategy can continue to drive strong results over time.
Turning to our results for the quarter.
<unk> revenue was $523 million down, 2% compared to last year and down 3% on a constant currency basis.
With the stronger result relative to expectations, driven primarily by journeys and schuh.
Well the journeys consumer remain discerning when it came to spending the magnitude of the store channel traffic in sales decline.
Improved versus Q1 and.
In our digital business saw a nice acceleration in year over year growth, increasing double digits with particular strength in July is back to school approached.
Our total comps were down 2% as strong double digit gains for shoe and Jerry and then were offset by the negative comps at journeys.
Channel total store comps were down 6%, while direct comps were up 14%.
But business Schuh total comps increased 17%.
Jan and then total comps increased 12%.
Journeys total comps were down 11%.
Overall gross margin was up 20 basis points as compared to last year.
Although journeys gross margin declines.
Decrease was less than anticipated and was more than offset by improvements in all of our other businesses.
As compared to last year journeys gross margin was primarily driven by incremental markdowns to clear product in the current environment overall.
Overall, we are pleased with the improvement in our other businesses as our initiatives to expand gross margin continued to gain traction.
But business journeys gross margin was down 100 basis points.
Shoes gross margin was up 280 basis points.
As the division benefited from an elevated product mix.
Assortment and reduce duties as a result of adding an Ireland based distribution center.
<unk> gross margin was up 60 basis points as airfreight tail winds and better product mix more than offset higher markdowns closeouts.
Finally, genesco brands group's gross margin surpassed our expectations in the quarter of 500 basis points as stronger operating and supply chain efficiencies to coal.
And the division benefited from price increases.
Mix shift.
Moving down the P&L adjusted SG&A expense was 49, 6% of sales.
An increase of 400 basis points over last year.
Given that we are a minimum levels of expenses at this lower volume time of year. It is difficult to drive them any lower in response to sales, particularly <unk>.
As it pertains to selling salaries.
In addition, we are experiencing the hourly wage pressures, while our time studies have yielded valuable insights converting them into store selling efficiencies is only beginning to take hold.
As a result, we incurred higher than expected selling salaries.
In addition, we recorded higher expenses to drive our technology initiatives as well as increased expenses in our divisions that are growing.
However, the deleverage would not have been as steep headwind not reversed approximately $5 million of incentive comp expense last year.
Excluding the set of comp comparison.
<unk> expenses Deleveraged 310 basis points when also adjusted for the incentive comp comparison journeys.
<unk> expenses were relatively flat on a dollar basis to last year.
Well oriented overall occupancy cost and reducing the amount of fixed expense in the store channel remains a key priority and we continue to make good progress in Q2, we achieved a 15% reduction in straight line rent expense.
On 59 lease renewals across the company with an average term of approximately three years.
This brings our year to date renewals to 96.
With over 50% of our fleet coming up for renewal in the next couple of years.
We have a lot of opportunity to capture additional savings in summary for the second quarter, we incurred a better than expected adjusted operating loss of $10 million compared to adjusted operating income of $10 million for Q2 last year.
This all resulted in an adjusted diluted loss per share of <unk> 85 cents for the quarter.
Which compared to earnings per share of <unk> 59, since last year increase.
Increased interest expense.
And a reduced share count also contributed to the declines in EPA does.
Turning now to capital allocation of the balance sheet, we ended the quarter as planned and a net borrowing position. We're pleased inventories were well controlled down 3% to last year.
Achieving our goal goal to be below last year's levels with respect to journey, specifically, we were able to adjust receipts and ended the quarter with inventory is 15% lower than last year.
And better positioned to invest on the newness trends, we need in the assortment.
JM and shoe inventories grew compared to last year to support the higher levels of demand in their businesses. We will continue to work with our brand partners to manage our inventory levels and adjust our product assortments to the back half of the year.
Capital expenditures in Q2 were $18 million with investments, primarily directed to our digital omnichannel initiatives and new stores.
We opened 10 stores, which were primarily off mall and in outlets.
And closed 31% in the quarter.
With 1375 total stores.
Finally, we repurchased 1 million shares during the quarter or 8% of total outstanding shares for $23 million.
$52 million on our current authorization.
Continued to Holistically review, our cost structure and we continue to anticipate.
The annualized run rate of up to $40 million in cost savings in fiscal 'twenty, five approximately $20 million of which will be realized in fiscal 'twenty. Four we're also shifting more fixed costs to be variable, thereby decreasing our sensitivity to.
Two revenue swings during times of economic turbulence.
These actions to shore up.
Cost structure are designed to maximize our operating leverage and provide a meaningful lift in operating income and EPS growth when sales rebound.
Regarding store closures, we have closed 54 journeys stores to the end of Q2.
Roughly 5% of the total fleet.
We're largely mall based locations.
To help you think about the positive impacts our P&L savings from 100 journey stores, we've targeted to close eliminates roughly.
$25 million in costs from SG&A expense, which will mainly benefit fiscal 'twenty five.
This is in addition to the $40 million of annualized run rate cost savings and as Mimi mentioned, we only need to recapture a small portion of those lost sales digitally.
I'll review a nearby store.
But net neutral effect on operating income.
Now turning to guidance, although Q2 results were better than we initially expected the consumer environment remains uncertain.
As such we believe it's prudent to retain our cautious view.
For fiscal 'twenty, four and not assume a significant change in.
Current sales trends through the balance of the year.
We continue to expect that the challenging journeys consumer and while we expect schuh and Jan him to continue continue performing well.
We are seeing some continued pressure in Q3 and the wholesale channel.
<unk> side.
Even with our cost reduction initiatives, we anticipate some of the escalating cost pressures we experienced in Q2 to continue in the back half, particularly in Q3 and.
In addition, we shifted some marketing expense.
Out of Q2 and into Q3.
These factors are offsetting the better than expected earnings per share, we realized in Q2, and leading us to maintain our full year outlook for adjusted earnings per share of $2 to $2 50.
With expectations for earnings to be near the midpoint of this range.
For the full year, we now expect total sales to decrease 2% to 4% were down 3% to 5%, excluding the 50 <unk> week.
This improvement versus our prior guidance, primarily reflects our actual Q2 sales results but.
But also factors in an improvement shoe.
We continue to expect the third 50 <unk> week to add approximately.
$25 million of sales and have a small negative effect on.
On earnings per share.
Some color on the total year end sales by business compared to last year.
For journeys, we now expect a high single digit decline.
Pursue we now expect growth in the low double digit range, reflecting the strong trends in the business for <unk>. We continue to expect a low double digit growth rate for genesco brands modest growth in the back half with a slight.
Decline in Q3 offset by growth in Q4.
We now expect gross margin rates to be flat to down 20 basis points compared to our prior view.
For fiscal year, 2000, and for gross margins to be down 30 to 40 basis points.
The change in our guidance is being driven by our Q2 actual results.
And some improvement at journeys in the fourth quarter as more newness flows into the assortment.
We now expect adjusted SG&A as a percentage of sales to deleverage 220 to 240 basis points compared to our prior expectation.
A 170 to 200 basis points of deleverage.
This is largely driven by increased wages and other cost pressures.
Despite this pressure journeys expenses are expected to decline in the back half.
Fiscal year 'twenty, four is cost savings measures and store closures to take hold.
Our guidance assumes no additional share repurchases.
Which results in fiscal 'twenty for average shares outstanding.
$11 4 million and we expect the tax rate to be approximately 24%.
I'd like to now provide some color around Q3.
Starting with the topline, we expect Q3 sales to be down low single digits or a similar percentage as the second quarter.
With respect to Q3 gross margins, we expect an overall gross margin decrease of 50 to 70 basis points.
Incremental markdowns, we have built in at journeys to ensure clean inventory.
Well as lower margins at <unk> due to product mix shift and higher markdowns against last years extremely lean inventories rigor.
Regarding expenses with additional pressure on selling salaries and other cost inflation, we expect roughly 130 to 170 basis points of overall SG&A deleverage in Q3.
Finally for Q3, we expect approximately $2 million of interest expense.
24% tax rate.
The share count of $11 million.
Summary, we continue to position ourselves to weather the current consumer headwinds.
While simultaneously, creating a leaner and more nimble organization that is better equipped to capitalize and deliver even greater shareholder value once the tide turns.
Operator, we're now ready to open the call for questions.
Thank you if you 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 May press star two if he would 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.
I T.
Our first question is from Mitch commence with Seaport Global Securities. Please proceed.
Yes, thanks for taking my questions I guess I have several I'll Skip you know and then jump back into the queue.
Maybe on the journeys business you referenced sequential improvement both in the press release and on the call today.
Any way you can you can.
I guess that's continued into August can you quantify that I mean are we are we like.
I mean did you get that like down mid single by August or kind of.
Just maybe go through that.
Thank you for your question and we are we were pleased to see improvement overall in the journeys business and I'll, just remind you that the journeys comp and the first quarter was down.
14% in the second quarter, we saw that improvement to down 11% and really as I said on our last call. When we got into may be.
The comp for May was pretty much reflective of what we were seeing in the first quarter. The summer was off to a very slow start and we didn't see it pick up until June but they picked up nicely in June and really picked up in July to being down in the high single digits are running down around 9%.
<unk>.
And that really carried through into into August and so we've seen that movement from down 14% down 11 to down nine.
Okay.
Then.
Yes.
It just sounds like us.
From a product standpoint, I know last call you talked about I think the last couple of calls you've talked about kind of the shift away from casual more towards what I think last call you talked about strengthened clogs can you just give us an update in terms of what youre seeing there.
Or are there there's been some bouncing around Mitch in terms of product, but in general what we saw in what I have described coming out of the pandemic is that our customers our team customers gravitated toward what we call the cash.
Casual side.
First as fashion athletic and our team always has a huge compliment of fashion athletic in their closet as what they were on a day to day basis, but fashion Swan much more to casual driven by purchases of more sandals more bids more shoes versus what we call fashion.
<unk> and <unk> and ups and downs, we're still seeing the strength within within the casual side.
In terms of.
What customers are buying and I've described before is that if you go back to go back to winter, we saw a lot of trading down from tall boots into shorter bids what our teams are liking is liberalized.
<unk> like product, but a little bit more more structured so clogs and I've talked about as well there are a number of different brands that are representing the clog style and.
So that's a nice trend that we are seeing.
We are actually getting some early reads on fall product interestingly, it's still it's still quite hot in many parts of the United States and but we are seeing that there are some more interest and more appetite in products for the fall and so I think in general the consumer has been sitting on the sidelines they've been picking up.
Choosing what they want to buy but the and I've talked a lot about the appetite for newness witches is driving what our consumer purchase behavior is.
Bonding to more than anything else and so that appetite for newness, we have seen translate into appetite for more fall and winter type product. Despite the fact that it's still it's still summertime.
And then on Hu.
Obviously that business is trending very well you referenced some market share gains there.
I guess I'm curious.
How much of this is Andy.
You talked about kind of a better assortment how much of this is.
But the assortment is that much better or maybe the consumer in the U K is stronger the competitive landscape has changed more there than here.
Can you parse that out a little bit more.
Yes, there are lots of dynamics within the UK market share business has performed just remarkably well in the face of pretty extreme headwinds there was a lot of.
The change in the consumer and the retail landscape there were a lot of retail store closures and the like but that's largely behind us and we're measuring against a market that has stabilized from the point of retail store closures and so against the backdrop of a.
Consumer environment in terms of inflation being high in terms of just overall spending power on the part of consumer the consumer being competed away shoe is out shining competition and truly taking market share and so the measurement of market share is that.
<unk> Assortments that she was offering to great service within stores.
Terrific abilities on the website is the.
The amplified marketing and the specific marketing to the shoe consumer is resonating and working really well. So it's a combination of lots of factors. In addition to access to more and better of our allocated product.
That's what's working well and that's been a pretty remarkable move up to number 10.
And in the overall market and Thats, a luminous a 383 places overall so it is a gaining of market share because of how well that team has has created strategies to go after the market and how effectively they are executed.
Okay, and then one more and I'll get into get back to the queue.
You mentioned some of the challenges around wholesale I think you referenced some weakness for J N M and the quarter and then also have you changed in your outlook for the back half.
Can you say, what Jane M. Wholesale was in the quarter and then could you maybe just again a little bit more color in terms of how youre thinking about wholesale whether it's virginia them or the.
The other brands for the back out.
The way to think about that matches that.
The one way you can get to it because we didn't break it out specifically is that Jane EMS.
Comps and that's really retail stores and e-commerce were plus 12% and the growth in sales overall for the business was up 4%. So you can get a measure of the overall wholesale headwinds there and.
With what we're seeing and I think what many in the industry are talking about is that.
Given the consumer environment.
Our wholesale customers that as our retail partners are just being very conservative and right now the number one thing is to keep inventories clean and even when and to keep them low and even when product is selling through nicely as it is evidenced by the great sell through in our direct channel.
Our partners are being cautious and I think that they just tower coming off of a huge.
Huge bulge of inventory and want to make sure that they are able to keep inventories in line and so those tend to be really pronouncements across the board again in spite of a sell through is great sell throughs within particular brands and so we have seen that in general on the branded side of our business and.
Have reflected that into our overall guidance for the back part of the year.
Okay. Thanks, I'll get back in the queue.
Thank you.
Our next question is from Cory <unk> with Jefferies. Please proceed.
Great. Thanks.
I was wondering if you could talk about some of the momentum that you've seen at Johnston <unk> Murphy you mentioned that comps were up fairly strongly so would be great. If you could just double click into what's driving that momentum and what you expect to head up the division.
Alright. Thank you for that question, we're very excited about our prospects for <unk> one of the most exciting opportunities for growth within our company and very much aligned with our strategy to grow the branded side of our business.
But we did what that team did.
<unk> is being really hard hit during the pandemic was to pay that much harder into casual and into comfort and it's great product with great styling, but also with special technical features.
<unk> proprietary chassis systems that's waterproofing.
Features.
Smart moisture wicking technology, and we've been investing a lot in the product. So it's a comfortable product. It's a product that's really filled with great features and it's much more casual in prior times, we have been.
Focused on a shift into casual might mean trading down average selling prices for our footwear, but because we have built and technology, we're actually able to achieve pretty similar.
Overall pricing for our casual product and in addition to that.
The team has done quite a tremendous job of proliferating categories and building. These technical features into the apparel and accessories, and so I talked about our overall apparel and accessories sales being up 20%.
Now comprise overall, 40% of our direct to consumer sales and so in general our customer really likes what theyre seeing theyre seeing an opportunity to byproduct that doesn't that they have in their closets right now and it's just fantastic when you put on the shoes you put on the apparel. It is so comfortable it is so.
So good looking and so there's opportunities for further expansion into other categories expansion.
Bought into.
Blazers had been doing really well this season.
We have expanded into our boys business as well and we think right now the opportunity is to build brand awareness our customers like what they are seeing some of our more recent research has said that we have opportunities to drive further awareness.
And that's what our that's what we're intending to do.
Great. Thanks, that's very helpful. And then just secondly on inventory it seems like you've made some really nice progress there.
Could you maybe talk about how you expect inventories to trend throughout the rest of this year and maybe the associated impact on margin. It seems like your inventories.
Maybe even be in a better place than the.
The industry more broadly so curious just.
Just to get a sense for where you're at on that journey.
Cory This is Tom good question, we're really pleased with what we've been able to do with our with our inventories.
The journeys group continues to have strong relationships with all of its key vendors and those vendors work.
And the merchandising team works very closely with those key vendors, making sure we have the right product at the right time and the appropriate inventory balance so we can.
Mitigate.
So for.
In terms of trends going forward you saw that the overall inventory was down.
2% to 3% agenda in the second quarter, we expect to even continue to improve on that for the third quarter and the fourth quarter and journey specifically saw was down at the end of the second quarter of 2015%.
We expect.
Similar kind of results in the third quarter.
Fourth quarter, so really pleased with that and I think in terms of how that impacts margins going forward, we feel a little bit more bullish in the fourth quarter on journeys margin as a result of that because we're going to end the year with an inventory position.
It's much more of their current relevant product, that's selling well vis vis a year ago. So.
Through really good what we've done with the inventory we've got continued processes in place.
Drive the business is driving the continued to watch inventories going forward now, which will help with the margins as well.
As Tom said, our merchants have done a.
A great job of managing inventory, but what's so good about this is it gives us lots of flexibility to chase into the newness that I've been talking about we in fact had been able to do that and so we've got ultimate flexibility to be able to bring in the product we need to be able to drive that business.
Great. Thank you so much for all the color and best of luck.
Thank you.
We now have a follow up question from niche commence with seaport Global. Please proceed.
Yeah. Thank you I've got another handful so I hope you'll indulge me.
On the journeys.
For the year it looks like it improved from down low doubles to down high singles.
So can you kind of walk through sort of what's implied for the back half of the year. I mean are you looking at like sort of down high singles and <unk> down mid singles in Q4 is that kind of the trajectory that you think that business is on.
Let me talk generally about that and let Tom Tom be able to weigh in but specifically the approach that we have taken is that we believe it's prudent to just keep extrapolating. The current trend Mitch so theres been a little bit of pick up in the current trend and so we're incorporating that into our.
Our overall thinking, but we're not anticipating that there is going to be a big pickup in the consumer market. We're not expecting that that is that you know any any major economic improvement.
Or decline in the back part of the year, we're just extrapolating out the trend what we are doing though is we are building in this newness that I keep talking about in the past that is resonating with our consumer and that's what is driving our overall our overall pick up it is product driven.
By gaining access to product that we have a good degree of confidence that we will sell through and so that's our that's the general approach that we've taken and I'll turn it over to Tom to give you any more any more color Mitch.
In the third quarter were really same expectations as we had.
Three months ago for the third quarter sort of down relative to the prior year of high single digits low to low double digits, and then the fourth quarter pretty similar expectations as well, maybe a slight improvement based on some improvement newness, but.
Really nothing of significance relative essentially pretty much in line with the prior expectations of booked in third quarter and the fourth quarter.
Okay, and then maybe just to clarify something you said earlier.
And reconcile that with your prepared remarks.
I think you said the job wide journeys comp was minus nine and I thought you said in your prepared remarks that August was better than July and and journeys does that is that the case was August rather than a minus nine.
Well I think what I was referencing in my prepared remarks, Mitch was the pick up from the second quarter into the third quarter and so really it was the going from the down 11 in the second quarter, which of course had sequential improvement into overall improvement into August .
Okay.
And then.
You mentioned the confidence that you have in the newness.
Prepared remarks, you also talked about some of the challenges around.
Inventory overhang have you seen any improvement there or are you anticipating less of a drag from that on journeys as we go through the balance of the year.
Okay.
We have been talking for several quarters at this point about the athletic overhang.
Within the industry and not within the product that we are selling and initially I think everybody was anticipating that this overhang would be cleared up by back to school and then the goalpost shifted out until the end of the year and what we are seeing out in the marketplace.
And what we're hearing from.
There are competitors and the like is that the overhang is still out there and it will linger or certainly through the back part of the year and that's incorporated within our overall thinking and we are anticipating that that by the end of the year.
We hopefully that the industry can really move past some of this but it's still existing today in the markdowns are still being taken pretty significantly you're not seeing that degree of markdown within that.
That's not a specific factor of that is that is affecting our business, but what it is doing is it's depressing demand for some of the athletic product that we're selling because the deals that are out there on really very good product is a is pretty attractive.
Okay, and then just a couple last one Tom on the other.
The journeys stores and you are closing a bunch of stores do you have a.
Our store count for journeys at year end.
Yeah.
I do.
Okay.
Yeah.
I've got kind of a separate one for you Tom.
On the $40 million of cost savings it sounds like $20 million of that is being realized this year.
Could you, maybe just kind of walk us through the phasing of that by quarter and we already started to see some of that in the first half of the second quarter and how does that kind of play out over the next couple of quarters.
And that's it for me.
This is the first question projected journeys store count is 1057.
At the end of the year.
Okay. Thank you.
And then.
On the cost savings.
Yes.
Yeah in terms of cost savings match most of the costs will still be in the fourth quarter there'll be some some in the third quarter, but most of it is still driven in the fourth quarter and we're still confident still feel confident about what.
We're doing it from that perspective.
In addition to we did.
As we talked about we do have a lot of initiatives in place relative to selling salaries and we're losing a lot.
Your hours relative to the prior year and selling salaries at the same time some of the traction.
Traction, we're getting in terms of reducing those salaries is not what we originally expected but.
Continue to work on that we still we will still continue to yield some selling salaries.
We also still have some good initiatives in place outside of selling salaries are dumped continue to double down on our occupancy costs going forward.
Got some initiatives in the branded group as well in terms of what we can do to reduce our expenses there.
And we also have some procurement initiatives in place relative to outside spend that we'll continue to work on that and then we've also have some good visibility and line of sight of what additional cost savings. We will look for for next year as well pretty similar categories for.
For next year as well so good good line of sight on that good confidence that we'll achieve that.
To the original question Theres more of it in the fourth quarter.
Another thing just to point out in the fourth quarter that this year the journeys fourth quarter expenses absorb a 50 <unk> week of expenses as well. So when you adjust for that if you adjust for a full year of <unk>.
The opex impact for store closings in the next year.
You really start seeing the opportunity we have here with us.
Reset cost base.
And you start thinking about.
Sort of modest expectations for the other parts of the business from a sales growth and a margin perspective relative to the success. We've seen there so modest expectations on the other divisions, given a modest comp improvement with journeys going forward into next year and with what we've done over the last.
12 months, we bought back 13% our share as you can see a lot of earnings per share leverage next year.
This does conclude the question and answer session.
I would like to hand, it back to management for closing comments.
Thank you for joining us today, and we look forward to talking to you on our next quarterly call.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.