Q2 2020 Earnings Call
Good day, everyone and welcome to the Genesco second quarter fiscal 2020 Conference call. Just a reminder, today's call is being recorded.
I would now like to turn the call over to Dave Slater, Vice President at DNA and Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us to discuss our second quarter 2020 results and our full year fiscal 2020 outlook with me on the call today are Bob Dennis Genesco is chairman, President and Chief Executive Officer, Mimi Vaughn, our Chief operating officer, and Mel Tucker Chief Financial Officer.
Participants on the call expect to make forward looking statements. These statements reflect the participants' expectations as of today, but actual results could be different.
Genesco refers you to this morning's earnings release, and the Companys SEC filings, including the most recent 10-K filing for some of the factors that could cause differences from the expectations reflected in the forward looking statements made during the call today.
Participants also expect to refer to certain adjusted financial measures during the call all non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this mornings press release and in schedules available on the company's home page under Investor Relations in the quarterly earnings section.
I want to remind everyone that we have posted a presentation summarizing our results and guidance and is accessible on our website.
As another reminder, we filed an 8-K in connection with our late with our last release in Q1 that contains adjusted non-GAAP fiscal 19 results by quarter for the last year restated to reflect the sale of Lids Sports group as if we never owned the business per GAAP requirements.
You can find that on our website as well.
Now I would like to turn it over to Bob.
Thanks, Dave.
We added two new people in the room with US today, just heard from days later, David joins us with over 20 years of retail experience with leadership roles at Chico's Fas dollar tree and Walmart.
Dave will be leading our investor relations function as well as our financial planning and analysis team.
We are excited to have someone with his relevant retail background joined our team as Dave mentioned, we are also joined today by our Chief operating Officer, Mimi Vaughn and for the first time mill Tucker, our new Chief Financial Officer.
Mel joined Genesco in June from century, 21 of the New York based Department store, where he was CFO since 2014.
We'll also has extensive retail experience having served in senior financial roles, leading companies such as best Pro shops, Petsmart and home depot during his 25 year career.
And we are thrilled to have some of his caliber on our team. So welcome to you both.
In a moment mill will review, our recent performance and update updated outlook in detail and maybe we'll cover some specific topics that could have potential impact on our business and the progress we're making on the shoe 20 point plan, but first let me walk through the highlights from the second quarter.
From a high level, our consolidated results exceeded expectations across the board.
The performance of our us footwear businesses journeys in particular fueled a 3% increase in consolidated comps our ninth consecutive quarter of positive consolidated comparable sales for our footwear businesses.
We were particularly pleased with this result, given the more challenging stock comp comparisons we faced as we moved from the first into the second quarter.
Importantly, our overall brick and mortar performance remained in positive territory at E Commerce comp sales accelerated to 20% continuing its strong multiyear run.
Total sales for the company would have been up but for the impact of lower UK and Canadian exchange rates.
The solid comp coupled with higher gross margins across all divisions resulted in a significant improvement in profitability.
Excluding bonus expense as Jay was up only 1% as we continue to benefit from the numerous cost savings initiatives, we implemented through fiscal 19 and in this fiscal year.
On an adjusted basis earnings per share was 15 cents compared with a loss of a penny in the second quarter last year.
This solid performance combined with our strong first quarter results represent a great start to our first fiscal year as footwear focused company. Following the sale of lids in early February .
We completed the balance of the significant work of transitioning Leds off our infrastructure and systems during the quarter and we continued the important work of eliminating the stranded costs associated with the sale.
Looking now as the performance of each of our footwear businesses in Q2.
For journeys it was another outstanding quarter as the strength of its product assortment fueled continued topline momentum even as the business was up against a more challenging comp comparison.
Strong full price selling of seasonal footwear, including sandals contributed at journeys Q2 sales and margin gains as did the ongoing success of fashion athletic styles.
As usual the retro and casual product that we're best sellers this year different from a year ago as the journeys merchants continue to showcase their ability to it definitely matters. The fashion rotation that is an inherent part of the business.
Both store and e-commerce comps at journeys were nicely positive, which led to a 4% comp increase on top of last year's double digit gain and a significant improvement in year over year profitability.
Similar to great recent quarters, great expense control along with strong sales allowed for expense leverage with rent leverage has the highlights.
Moving over to the UK the operating environment remains difficult due to the continued soft consumer demand for apparel and footwear challenging retail traffic overall and the overall economic weakness related to even greater Brexit uncertainty.
Given all that we were pleased that shoe achieved a flat comp driven by improved ecommerce results.
Sure team did a good job navigating the current headwinds to deliver higher gross margins than a year ago through careful inventory management and lower markdowns on sale product.
Unfortunately, this effort wasn't enough to offset lower overall sales from changes in foreign exchange, coupled with the deleverage from negative store comps in the quarter.
Some of you might have seen a recent article in the UK is Sunday times that reported schuh had engaged an outside advisor to help explore potential restructuring opportunities.
It's important to understand the meaning of the world word restructuring in this situation. We are largely looking at ways to renegotiate rents for Schuh store fleet in order to improve profitability. Following the ongoing declines in high Street and mall foot traffic, making these rents on economical.
Let me be clear as I think the article might have been misinterpreted we are not exploring a potential sale of this business shoe remains firmly in our future plans and we are encouraged by the results of our 20 point plan and we are committed to working closely with the team to improve upon recent results.
So now back to the U.S Johnston <unk> Murphy retail comps improved from first quarter levels, despite being up against stronger comparisons in the second quarter.
While the shift to the sale catalog to later in the quarter versus last year was less affected than we had hoped resulting in James 1% comp gain we did benefit benefit from stronger apparel sales.
The business also achieved better gross margins and benefited from lower expense dollars to deliver an operating profit above last years levels and ahead of expectations.
Nine of the top 10 shoes for the season in our retail business were casuals sport or hybrid styles with athletic inspired bottoms underscoring the progress Jana has made to diversify its product offering beyond the dress shoes that the brand was originally known for.
Finally licensed brands also delivered a better bottom line performance with meaningfully higher gross margins on lower sales.
With a sizable cash flow generated from operations last year and the sale. This business, we have been actively buying back stock Opportunistically and returning capital to shareholders.
Across the two authorizations totaling $225 million, we began buybacks in late December and as of last Friday had repurchased close to 5.2 million shares almost exhausting the second authorization.
This represents a 27% reduction to average shares outstanding last year.
While the most recent repurchase activity will aid earnings for this year the impact will be in the back half.
The improvement in earnings per share above our expectations in Q2.
Was driven by better operating performance and not by share buybacks.
Even after finishing these two authorizations, we still have excess cash flow from last year, we can put to work and we anticipate generating additional cash flow in this fiscal year to add to that.
We are pleased to share that the topline momentum that we experienced in the second quarter continued nicely in August on both sides of the Atlantic for journeys and pursue through the heart of the back to school selling season.
Jane ends August comp results slowed during this low volume month for this business as fall goods begin to land and before a shift in the season begins.
Based on our strong first half results and positive start to the third quarter.
Combined with the repurchase of more shares than we initially expected we are raising our full year guidance. We now expect earnings per share for fiscal 20 to be between $3.80 and $4.20.
Up from our previous range of $3.35 to $3.75.
And as always we do regard this guidance as a range with some upside and some potential downside.
We are now more optimistic about journeys results offset by foreign exchange headwinds at schuh and some comp headwinds at China.
Later in the call and maybe we'll review some of the other headwinds we potentially face in the back half, which have not been built into our guidance, namely tariffs and Brexit and our plans to lessen their possible impacts.
With respect to our guidance something close to the middle of reflects our best current fully aware, we might come out for the year, which represents an increase in the neighborhood of 20% over fiscal 19 earnings from continuing operations of 3028 cents.
And with that said, let me turn the call over to Mel even more specifics on the financials and the guidance over to you know thanks, Bob Good morning, everyone. As Bob said, we were very pleased with our second quarter performance our year over year profit improvement was led by journeys with Johnston <unk> Murphy and licensed brands each contributing to the improved results. Adjusted EPS grew considerably to 15 cents from negative one cents in the prior year driven by solid comps improve gross margins, both of which contributed to beat versus expectations.
This was partially offset by some has seen a de leverage in this lowest volume quarter with small increases in expenses can have an outsized impact.
Q2, consolidated revenue was flat with last year at $487 million.
Excluding the effect of lower exchange rates revenue was up 1% consolidated comps were up 3% with store comps up 1% and direct comps up 20%.
Positive comps were offset to some extent by lower wholesale sales and closed stores.
Direct as a percent of total retail sales was 10% in Q2 up 150 basis points accelerating the good progress we continue to make driving E. Commerce. As a reminder, we run our ecommerce business to be a profit center, we could grow E com more rapidly with higher marketing expense and more free shipping and return offers we choose instead to keep an emphasis on profitable growth.
Journeys posted a solid comp increase of 4% on top of a robust 10% gain last year, marking the ninth consecutive quarter of increase is highlighted by both positive store comps and strong did double digit e-commerce growth comp sales on a two year stack basis improved from Q1 to Q2 highlights of Q2 s for pump performance included mid single digit increases in conversion and a low single digit increase in transaction size, which drove a strong comp in spite of less store traffic.
Shoe posted flat comp sales for the quarter in spite of a challenging macroeconomic environment in the UK versus a negative 7% a year ago, not including the impact of foreign exchange shoe total sales were down only 1% for Q2.
E Commerce posted a strong double digit growth in comps of that offset by negative store comps store traffic declines and lower conversion rates were partially offset by higher asps comp on a two year stack basis improved sequentially from the prior quarter from double digit negative single digit negative consumer brand choices continue to be polarize with strong preferences for certain athletic and casual brands increased in kids accessories sales were highlights for the quarter, Jane and posted a 1% comp for the quarter on top of a challenging 8% comp comparison from the prior year.
A decline in store traffic was offset to some extent by an increase in conversion and higher transaction size ecommerce comps drove the positive overall comp for the quarter.
Q2, consolidated gross margin increased 110 basis points to 48.6%.
Journeys gross margin increased 70 basis points due to freight claims credits lower shifting in warehouse cost and lower markdowns Schuhs gross margin improved 50 basis points due to more efficient sell through of cell product with lower markdowns at Jane and gross margin was up 150 basis points due largely to a favorable comparison in the wholesale business that we made the decision to clear merchandise last year in our womens category licensed brands gross margin improved 470 basis points due to more direct to consumer shipments fewer markdowns and less close out product total adjusted SGN expense increased 30 basis points to 47.6% driven primarily by increased marketing expense as overall mall traffic has declined we have been growing our direct channel. We have invested in additional paid search and catalogs to drive traffic to our stores into our web sites. This increase in marketing expense was partially offset by lower Bowl.
Bonus expense and rent savings in this low volume sales quarter at a 1% store comp we deleverage store expenses, just a little bit thanks to the cost savings initiatives. We began last year. We had continued cost reduction and profit enhancement activities into the current fiscal year included in these activities as an effort to eliminate shared and stranded costs as a result of the lives divestiture.
In total we had between 12 and $15 million of expenses that were allocated or shared with lids, primarily in areas like finance. It HR in the call Center. We believe over time, we can eliminate much of this stranded cost and are working to work diligently towards that end as a bar to the larger cost reduction efforts. We continue to have in partnership with our landlords very good success on with renewals and rent reductions. We've negotiated 92 renewals year to date and achieved a 15% reduction in cash rent or 11% on a straight line basis and use this was on top of a 15% cash rent reduction or 8% on a straight line basis for almost 170 renewals last year, an important aspect of these renewals is a short term which for this year averaged approximately three years. This allows us to think about rent increasingly as more variable than fixed providing flexibility in our cost structure other areas of savings identified this year.
Include store labor hours warehouse expenses and credit card fees and total between stranded cost elimination and these other opportunities. We aim to identify this year another $20 million of cost to take out of the business in summary, the second quarter's adjusted operating income was $4.7 million versus $1 million a year ago, adjusted operating margin increased 80 basis points to 1%.
Operating income dollars increased for every use footwear division offset to some extent by shoe and higher bonuses at corporate turning to the balance sheet inventory is in good shape Q2 inventory was up 2% on flat quarterly sales, we intentionally added inventory journeys to be better positioned to supply our business. During the back to school period journeys inventory was up 6% on a sales increase of 3%.
Jane Ins inventory was down 4% on sales that were down 2% Schuhs inventory was up 2% on a sales decrease of 1% on a constant currency basis as shoe successfully managed inventory and a tough retail environment.
Capital expenditures were $7 million and depreciation and amortization was $12 million, we continue to aggressively return capital to shareholders using almost all of the $100 million repurchase authorization that our board approved in Q1.
As of last Friday August Thirtyth, we had repurchased close to 2.5 million shares for a total of $99 million altogether, including the initial repurchase authorization of $125 million, we have repurchased 5.2 million shares since December for $224 million.
We ended the quarter with $58 million in cash versus $50 million, a year ago and know us dollar borrowings.
Moving on to guidance for fiscal 20, with a better than expected Q2 performance and a solid start to Q3 in the important high volume back to school season, coupled with the repurchase of additional shares we are taking our EPS guidance range up to $3.80 to $4.20 compared to our previous guidance range of $3.35 to $3.75 something close to the middle of this new range reflects our best current belief, where we might come out for the year. We continue to assume low single digit overall comps for the year to remaining quarters due to more difficult stack comparisons in the back half for journeys in particular, while we have increased journeys Q3 comp assumption given the positive back to school results. Thus far we have reduced our Q3 comp assumption for JM given the slow start to the current quarter. In addition, since the last time, we discussed guidance we face further further.
Headwinds from the weakness of the British crown, which could affect sales and profits for the year.
Another a variable is the exact timing of eliminating stranded costs from the list divestiture. While we are pleased at lids is completely off our shared services and systems and are confident we will ultimately eliminate much of this cost lids unplug, even faster than we expected we have a detailed plan to eliminate the stranded costs that remained but have more potential exposure for this year in Q3 expansion really due to this timing.
And the high end of our guidance range, we eliminate more cost in the low end last the guidance also does not anticipate repurchases of shares beyond the buybacks. We've already completed as Bob said Mimi will discuss the possible impact of tariffs and a hard Brexit in the UK, both of which could affect our results, but we have not built anything implicit explicitly into our guidance relates to either these factors for the year. We still expect consolidated sales will range from down 1% to up 1% with the high end of the range, becoming more challenging with the pound weakness, but now expect higher consolidated comps ranging from 2% to up 3%.
The store comps underlying guidance now range from up 1% to up 2%, we still plan to open around 30, new stores, mostly journeys in journeys Kidz, we plan to close around 40 stores, if we can't get the right rent deals or square footage decrease for the third year in a row.
We now expect gross margin to be up 30 to 50 basis points in total up from our initial estimate of 10 to 20 basis points, which multiples with much of the improvement coming from the branded businesses, namely Jan them and licensed brands with a low store comp and the timing of eliminating stranded costs. We now expect SGN expense will de lever in the 30 to 50 basis point range.
This all results in an operating margin within a few tenths of last year's levels in EPS that ranges from up mid teens to up in the high 20% range due to the net impact of share buybacks. We now estimate that fiscal 2000 tax rate at approximately 28%.
An important call out from modeling for the remainder of the year is that we expect much of the year over year improvement EPS in the back half to come in the fourth quarter.
Capital expenditures will be around $45 million as we plan to cement more on digital and Omnichannel investments, while still investing to refresh our store fleet, we estimate depreciation and amortization at $50 million. Lastly, we are assuming an average of approximately 15.7 million shares outstanding assuming no stock buybacks beyond what we have made to date now I will turn the call over to Mimi, who will cover how the company is positioned to deal with two external headwinds tariffs and Brexit and provide an update on our shoe 20 point improvement plan.
Thank you now good morning, everybody.
As Weve discussed its been a strong first six months of fiscal 20, and we're heading into our busiest selling season with nice momentum.
While we feel good about our prospects for the year evidenced by our heightened outlook, both carrots and price at present possible headwinds and we're taking specific actions to mitigate their potential effect.
Most importantly, we continue to root for a successful resolution of trade negotiations with China.
As far as the fourth tranche of tariffs effective on September Onest and December 15, we don't believe the impact will be significant in this fiscal year and haven't yet included anything in our annual guidance as it remains a very fluid and dynamic situation.
On an annual basis currently about one third of our merchandise is imported from China, We had approximately 10% from direct import and the remaining amount imported by third party vendors.
So to give the details in terms of direct exposure, we developed and directly sourced merchants merchandise for Johnson in Marquis and licensed brands.
Which together were a little less than 20% of our total sales in fiscal 19.
Of those said approximately 50% currently comes from China with a more heavy weighting to licensed brands, resulting indirect sourcing from China from merchandise, representing a little less than 10% of our sales in total.
Since most of this product is leather shoes that Trs. Unfortunately went into effect at the start of September versus in mid December .
We will we pulled forward as much inventory as we could for receipt ahead of September Onest and have been working with our vendors to share then now higher costs.
The devaluation of the Chinese line is also helping lessens the near term impact.
We currently estimate the potential impact to our bottom line in this fiscal year and nothing changes under the current circumstances to be in the neighborhood of $1 million relating to this product that we source directly given how late it is in the year.
Looking further out our intended to diversified sourcing as much as we can outside of China and these efforts are well underway for fiscal 21.
The balance of our merchandise is imported by a third party vendors for journeys, which accounted for 65% of total sales last year, we estimate that 30% to 40% of the product we buy from third party vendors is currently sorts from China.
The remainder of our business, which is based in the UK and the Republic of Ireland of course does not affected.
For this indirectly source product, we would expect that our third party vendors would undertake similar actions to what we're taking however, we have less visibility into their specific plans.
We do know that many of our vendors, especially the bigger ones, which represent the majority of our purchases as some time ago diversify their sourcing to include countries. In addition to China.
Therefore, we anticipate they will shift as much product source from factories in places like Vietnam to the last as they can to mitigate any impact.
The good news is that today, we have not heard from any of our footwear vendors that they intend to pass on price increases for this year.
Shifting gears added Brexit, while the hope a hard Brexit, which entails the UK, leaving the European Union without a trade agreement in place does not become a reality our shoe team has been diligent about understanding the potential impact and has spent several months crafting a detailed contingency plans to minimize disruption as it does.
While there will be some additional costs to operate in this new environment, they would affect only a small amount of shoes product and operations.
The Brexit situation evolves daily, but we believe we will be well prepared for whatever comes our way.
To give some color we have to think about this situation both from the standpoint of what we source and where we operate.
Like our situation in the last year has those indirect and direct sourcing the indirect piece that product brought in by third party vendors represent almost all the flat sheet currently sells.
Today much of this product lands on the continent before coming over to the UK duty free and lit nail customs border. It's our current understanding that the UK government plans in the event of a hard Brexit that fits landed in the UK can be cleared immediately and duties paid retrospectively.
And as though the vast majority of the product, we sell would be able to flow freely into the UK.
For the remaining product that shu directly sources, which is largely our private label product a little over half of this comes from the EU.
These guys could potentially be subject to additional tariffs, which would represent a small amount of additional costs. If we can't find alternative sourcing outside the region.
Then in terms of where she will operate itself is 132 stores tenor in the Republic of Ireland, which we remain in the EU.
Our product flows back and forth freely between these markets with new concepts are duties today, we have options for the future, including setting up a mini distribution center in Ireland to land product directly and supply. These 10 stores and e-commerce demand rather than continuing supplying from the UK.
This change will drive some additional costs, which will be partially offset by savings from the removal of other costs, we incur in todays supply chain.
This unique team has successfully set up many distribution centers in the past and stands ready to implement this plan in a matter of weeks if necessary.
So in summary, the incremental costs from Brexit would be potentially some duty on a small amount of the product we sell plus the additional expense of operating a mini distribution center in the Republic of Ireland, which should be manageable. Most importantly goods will continue to flow into the UK.
Touching now on our shoe 20 point program consumer spending in the UK has held up relatively well thanks to the strongest labor market in decades. However for some time now purchases have been concentrated in basics like groceries and housing while purchases and discretionary categories, particularly footwear and apparel has been under significant pressure.
There continues to be a clear divergence not only across categories, but also across channels as growth on online spending far outpaces growth on the high Street.
The incessant spreads it back and forth and prolonged uncertainty has weighed on consumer confidence, which has been declining for some time now.
Against this challenging retail and consumer backdrop and shoes performance as we discussed at our on our last call. We implemented an aggressive set of actions aimed at immediately addressing near term profitability.
At the same time, we're executing initiatives to enhance shoes standing with the consumer and with that brand itself to better position shoe over the more medium term.
This new team is working hard with great urgency to impact the business.
These initiatives include among many others testing new categories like soft and Apparels that fuel add on sale.
Launching new digital marketing marketing campaigns.
Implementing new selling techniques and incentives to drive in store conversion, continuing cost reduction initiatives and rapidly adding to the database as consumer names to bolster its marketing program.
As one of our most critical initiatives as Bob mentioned earlier, we are attacking she is fixed cost structure with a strong focus on rent reduction in this environment, where traffic into stores has declined and rents are well above what the market warrants today, we must make progress on this front and achieve not only redemptions that more flexible rent structures to weather the current retail volatility.
So now I'll hand, the call back to Bob to close.
Thanks Manny.
The strong start to the year, including our ninth consecutive quarter of positive comp sales as a footwear company is a testament to the dedication commitment and hard work by our employees on a daily basis.
There are not many who combos of this track record of success of positive comps and with a solid start to the third quarter of the current trend continues knock on wood, we are on our way to adding a 10.
We want to recognize the contributions of all of our employees and tell you how much. We appreciate you.
In addition to our team's ability to execute there are several reasons, we are optimistic about our future.
Our company is anchored by well known brands with strong consumer connections and loyalty positioning us well in today's volatile retail world.
Bolstering our confidence.
It is the fact that we were early to invest in digital and Omnichannel infrastructures and today enjoy advanced capabilities, allowing us to connect with and serve our customers whenever and however, they choose.
The combination of our digital offerings and fleet of stores and important strategic asset represents a powerful platform to win with today's empowered consumer and emerge as a clear winner in the ongoing consolidation of retail.
We are working hard to reposition all our stores with shorter more favorable lease terms, which gives us ultimate flexibility.
And now as a footwear focused company the synergies among our businesses provide us with even more opportunities to drive enhanced profitability.
And greater shareholder value over the long term, we are truly stronger together.
And with that said operator, we are now ready to take questions.
Thank you and if you would like.
Any signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your function is turned off to allow your signal to retire.
Again that is star one to ask a question and we will pause for a moment tell run an opportunity.
Question.
And we will take our first question from Janine Stichter with Jefferies.
Hi, good morning, everyone and congrats Sean corridor.
Just hoping that given a little bit of perspective on journeys and it seems like the trend you're seeing there is pretty broad based so can you just give us some perspective on what the concentration looks like whether it's by brand or by style that you're seeing right now and then maybe some thoughts on how you're thinking about for the holiday season, and then kind of along those lines and also the commerce business really strong this quarter. So just any thoughts on what you're doing there that may be driving that Chris. Thank you.
Sure. So today. This is start with that perspective on on the brands and we've talked about this retro athletic trend that started with certain brands and it really has morphed into demand for other brands and sales. This trend has a lot of legs because many of those athletic brands that we carry cat retro style hit south in their libraries really spanning backend so the brands and the sales driving the business today are the ones that were driving the business two years ago. So we've seen nice rotation within our business and we are very pleased with the breadth of the comp drivers lately casual has been adding to the mix while at the same time, we have seen the athletic continue to be strong we had a very nice sandal season strong sandal season over the course of the summer annually.
I had a strong bid season last year. So we'll see about the upcoming bid season, it's a little too early to tell the the temperatures across the country at least Nashville is really is in excess of 90 degrees of it hard to get a clear rating on the bid season.
As yet that we feel like we are well diversified across brands and across franchises that is on a lot of newness and what we've been seeing.
We are particularly.
We are particularly pleased with the progress as I said that we are making in casual.
On ecommerce growth for the upcoming holiday season. It look we continue to make great progress with an E. Commerce. Some of the things that we're doing is we're just investing and I think Mel said it on the call is that we run our e-commerce business to make profit since IPO, we measure carefully some of the investments that we're making and ensure that we're getting positive returns for that but we have been spending more on paid search we have been spending more on catalogs have been a really effective tool to drive traffic not only to our web site.
But also to our stores and we had a really nice set of investments that we made in new systems like order management that have given us some robust capabilities.
Helpful color. Thank you very much.
And we will take our next question from Jonathan Komp with Baird.
Please go ahead.
Yes, hi, Thank you, maybe maybe just to follow up on journeys.
I know the.
The business is performing well against tough comparisons the comparisons staying fairly tough. So if you could give any more color on how you're thinking about the sustainability. There I know, you're you're embedding lower comps, but you've exceeded plan recently so.
I'm curious.
The potential for that trend to continue.
As you look forward and.
And the business as the seasonal mix changes.
Yes, there is not a whole lot more to say this bob at the.
The second quarter. These the the notable thing about second quarter. It was we were we were comping against two years for the first time of positive comps and we continue to write up so we believe we're gaining share.
And we think the trends that were driving the business in the second quarter. They obviously as we disclosed persisted through back to school and so we feel like we've got a good assortment for holiday. So we're feeling good the only thing that modifies a little bit our outlook relative to how journeys during the first half is the comparison that they got tougher.
Especially in the fourth quarter, so we're being a little in our guidance you know a little more muted in our comp expectations, but it's not because we don't think that business is strong. We just think the compares are are up there. So.
That's about all.
I wouldn't say that journey, yes, the only thing that I would point out is that we moved from a two year stack of plus 1% in journeys to up 11 in the second quarter, and we performed really well against that and so in spite of the fact that there are.
Equally tough compares in the back part of the year, if we put that performance up in that second quarter. It does bode well for the back the back half.
Okay, and then maybe just a similar question for shoe I know you outperformed in the quarter, but didn't change the comps outlook. So is that.
Embedding conservatism given all the factors you talked about me or how should we read that in the second half outlook there.
Yeah, I think I'd start by saying that.
We feel like we have a really good underlying business that shale, we've got advanced technology. There. We've got a strong customer service orientation, and we've got a really good experienced management team and a very challenging environment, we feel like our 20 point plan.
Focusing on near term profitability is good and as you said, our comps were better for the quarter than we expected the thing and really just to highlight for the back part of the year is that there's just a lot of uncertainty in the UK, it's like watching a ping pong match, where every few hours. There is there is just new information out there around Brexit and so just being.
Cognizant of that I think that Thats, what has caused us to continue to be conservative in the back half well see how things that develop from here.
And with Schuh was worth keeping in mind is in the UK as as we noted in the opening remarks.
There has been an even more pronounced shift towards e-commerce and away from stores traffic on the high Street spin even tougher.
The good news for US is long ago, I've, even predating our acquisition of shoe they were out ahead of.
Digital and Omnichannel in a big way they regularly get rated as the best if not one of the best and sometimes the best Omnichannel all in retailer in the UK and those capabilities are becoming our friend.
In a big way, so with that shift that thats what happened in the <unk> in the quarter. They were up they were negative in the stores, but very strongly positive online as I just got a terrific.
Machine.
We're serving the customer and whether that customer that wants to be served so that helps build some confidence.
Okay. Great then last one for me just on the profit outlook, maybe first if you could remind us that the $12 million to $15 million of stranded costs does that set of annualized number and how should we think about kind of the impact during bad AME by quarter.
On a rough basis, and then might be early for that smell, but im curious kind of coming in with a fresh look if there is any any areas that you see bringing in your perspective that might be able to go further in terms of some of the cost savings.
Opportunities that the company has been pursuing our if you think it will be pursuing kind of.
The status quo in terms of the Bay area is that already being looked at.
So I'm going to take that stranded cost question, and then hand, it to Analogist to talk about some of the profit improvement initiatives that we continue to pursue for this year, but that.
We said 12 million to $15 million.
Stranded costs and and that is over the course.
The fiscal year.
I would just remind you that we share the expenses in areas like in HR and finance.
With lids and in the first half of this year as you think about it we were providing these that we continue to provide the services selected and so while we had the cost. We also were getting some revenue to cover those costs.
We've talked about lids, unlike unplugging, even faster than we expected.
By the end of next year, we think we can eliminate most of these costs out there with all but about perhaps $2 million to $3 million of that expense, it's going to take a little time, because we need to renegotiate contracts and reorganized some of the work and reinvent how we go at some of this work with Feltl is building and we had a path that it will take some time. So that really is what is weighing that generic sense in the back half of the year is just.
Our.
Anticipating that we're going to carry these costs. We've got really good plans in place. We've got people who are working to eliminate these costs and to the extent that we can make progress faster than we thought planned out then that will be good for the bottom line for the business.
Turning it to meld is to talk a little bit about the the profit improvement and cost savings, yes. So I would just echo kind of what Mimi has said and I think that the important thing is we've got a line of sight to eliminating these costs.
It's just a matter of taken action to get it out so while we have a line of sight really the question in my mind is just timing of when we're going to take it out we're kind of starting stop but we're now moving forward and taken action on removing the costs.
I think the divisions have done a very nice job of identifying opportunities on their PNM to pull costs. So the 12 to 15 and stranded costs. We think most of that's going to go away.
We have also challenged him to go out and get some more for a grand total of roughly 20 million in cost takeout.
I expect a good piece of that to be out.
On an annualized basis as we end the year, but the rest of it coming in the first half of next year.
And we don't have full line of sight to the entire 20 now, but the piece as 12 to 15, we do.
Okay. That's very helpful. Thank you all.
And our next question will come from Steve Marotta with CL King and associates.
Please go ahead, good morning, Bob maybe email and Dave Mimi just to reiterate I want to clarify you mentioned that this year based on the timing of the tariffs in the mitigating factors that you've implemented so far basically bringing items in a little bit earlier that there's $1 million of direct Cogs exposure in the current fiscal year to the incremental tariffs is that accurate.
Yes, that's right and that's that's mostly associated with.
The products that we bring in directly I think that I, just want to give a shout out to our Johnston <unk> Murphy and our licensed brands team. They weve been having terrace talks have been going on since much earlier this year since the spring, but they got on the issue right away they've done a great job of pulling product forward as much as possible. We originally thought tourists might go into place in August and so they went out and they pull this product forward and everything we've heard about the September Tara.
Our teams went back to work renegotiating with factories to contribute and have had lots of success and getting factories to say, okay. We will help absorb some of this cost a small amount of the product is affected by this year because you can imagine we landed much of the product that we're going to sell in the early fall and so the exposure that we have is really in the very back part of the year and sale of we're hopeful for some resolution of trade overall, but considering everything that we have right now the million dollars is associated with the the goods that we import we really have heard nothing from any of our third parties that were where vendors about price increases so that.
From our view right now should not have an impact.
Very helpful.
And Bob roughly three years ago, there was a switch from a trend standpoint to retro.
And.
Caught everybody by surprise this relates to the swiftness of that.
That change.
Kind of a two part question. One is are you seeing anything new that might.
Different than the retro trends in a year from now and layered onto that is what kind of processes are in place now that may not have been three years ago. So that.
Even a swift.
Change in trend might not mean, such a headwind to comps and incurred.
Well, Steve Great question I'll frustrate you in several ways.
First off if we did see a forward trends that what is going to change the landscape of the merchandise. We wouldn't tell you because we consider that competitive advantage.
What we said previously is absolutely the case, which is having seen.
<unk> a good back to school with the assortment that is current work is currently working in having good visibility on what the assortment is going to look like for holiday. We obviously feel good about where we're headed hence the guidance.
You know I never going to promise you that.
A overnight rotation in fashion from the teenage crowd is never going to happen.
And so it's a little hard to be predictive of that what we are doing is trying to stay as diversified as we can with respect to vendors and franchises and so we continue to track with selling well our guys. Obviously are really good at moving out what's not moving well and right now we're on a very very good trend up the one that happened three years ago, three or four years ago was.
In our history pretty much a one off in terms of how sudden and how severe it was.
And so history would say that that was a one off but.
As you know black Swan events or black Swan of that so.
I would never say never.
That's helpful. Thank you very much.
And our next question will come from Sam Poser with Susquehanna.
Hi, good morning.
Good morning, Thank you for taking my questions and.
With.
Okay I have a whole bunch number one you talked about the impact of Brexit on on the shoe business or the potential impact and so on from a sort of an operational perspective, but what about on us like on a ongoing sales perspective, yes, you can get the goods into the country, but what's it going to do to demand I mean, whats the impression if Brexit actually happens if it happens on a hard Brexit or Sop Brexit how are the consumer do you think is going to respond there.
Period, you know.
In general well right now so.
The economic conditions by conventional measures in the UK are actually pretty strong and.
As maybe you had noted the consumer is spending they're not spending as much on apparel and footwear.
And so and consumer confidence is a little weak.
In terms of what happened what's going to happen. There are so many scenarios in terms of what.
Hey, Hey, Brexit could look like it there will be one at all so it's it's pretty complicated or I'm not sure. There is a consensus of most people who know more about this than we do.
About whether this introduces a recession to the UK or not.
Oh, which was you know it infected appointments it obviously trickles down through consumer spending, but it's just very very hard to read exactly what the outcome would be.
If some form of a Brexit takes place because we don't know what that form is and so it's just really hard to predict so what we're doing obviously is where we're doing a lot of other people are doing which as you stay in that level of uncertainty you stay as flexible as you can and to be honest you know the amount of investment you put in is not going to be what it would be otherwise if you had a clear line of sight.
To what the economic conditions are going to be so so we're basically holding on tight we're hoping that the country resolves. This in a way that's favorable for the economy and the UK population and we'll all wait to see.
And then I've got a few more one follow up on on on Shoe. You mentioned you know that article that came out and they are fully committed can can you Uh huh.
You know what do you I mean, what are you foreseeing with shoe no longer term you know given sort of the <unk>.
The fits and starts it's sad.
Over the last few years, you know putting together through the you know the 10 point plan.
But why do you know the full commitment to the business.
What would it take to change that and you know given that there's.
It's sort of been hit and Miss and then you have these.
Yes, well you know the macro issues are the macro issues.
One of the things that we think.
The macro issues are forcing is a consolidation of retail in the UK and so when we saw a flat comp achieved by shoe with an improved gross margin.
In an environment, where footwear it was tough that indicate that some of that consolidation is happening. So you know footwear has been sold and.
And a lot of the bigger boxes, and the UK and as you well know many of them have been challenged economically.
And so if there is going to be square footage reduction in the UK that becomes our friend our biggest cost opportunity there as we highlighted in our remarks is rents.
The.
The conventions for rent setting in the UK are very different from the U.S. and they're there and they're.
The best where I come up with is a little bit murky.
But given all of that our team believes that there is an opportunity to partner with a lot of the landlords and to say, let's look at the long term.
I must try to get to some rent structures that make sense for us and for U.S. So everybody in this industry can have.
Good long run so.
You know there are the average AFE on someone's phone is very short list, we tested apps and other businesses of ours, we continue to revisit it because things can change very quickly, but right now we're very happy with the way that were set up at the moment, Yeah. We had invested a lot in our mobile site and being having responsive design so that.
The screen and job still ever mobile device. The path. We streamlined checkout features you've really made the mobile experience a very positive experience as Bob said, Oh, we yeah. We found that asps tend to work for businesses that have lots of repeat purchase as within you know several months I am sprinkling their frequency of purchase it is a is more than a purchases or somewhere else and I. We think that there right placement that for now it's really within our mobile site and making it as a as user friendly and as fast as we can.
And we will take our next question from Mitch Kummetz with pivotal research.
Hi, guys. Thanks for taking my questions.
Well, let me start with you just you mentioned back to school momentum at journeys and Schuh and I guess I'm most interested in journeys I know back in the good old days. He was there just given US an August comp PAMA, we could call. It a day I'm guessing you don't want to go back to that policy, but could you maybe speak to a little bit Directionally I know there was little bit of back to school in a quarter a good two three weeks back to school in the quarter I'm curious if you know I'm kinda quarter. If you saw sort of a step up in your journeys comp from sort of earlier on a quarter or two those last two or three weeks for back to school I was hoping maybe you could speak to it that way.
Well, we're just going to stick with you know we saw the get the momentum from the second quarter continue into the into the the third were reluctant to get more specific and you're right. The goal days, we used to give you a number you know there's a lot of noise right now in some of the most recent retail numbers because of the hurricane threats that occur on the east coast. We saw some some huge volatility in the last week you can just pick out the people who were working up their their store fronts and so it's we're reluctant to say anything more than the momentum from the second continued into the third and we were happy about that.
I was just curious.
We did raise guidance for journeys out for the third quarter, and I think that where we're taking a balanced approach to the outlook for for the third quarter. Okay. And then on the margin this incentive comp I feel like at the beginning of the year you view that as a positive.
It was a pretty substantial opportunity for leverage I'm. Just wondering if that has changed just given how particularly how the journeys business has performed and then also just from a corporate standpoint is that becoming less of a opportunity for leverage relative to you know the the bonuses you're paying last year.
Yeah. So much I think you're exactly right I think that what we had called out is that for last year. It bounces around quite a bit I'm, just because we have happier as honest as the year before when we began the year. If you look at our plan. We have done is just that a alone one level than they are today, but just given the good performance in the first and second quarters. A bonus has a has increased and so well see where we end up for the year. There there ought to be under most circumstances, you know some pickup from bonus but not to the magnitude that we began the year thinking it would be so.
No as you know we are bonuses based on improvement of year over year performance.
My budget and so.
Since we're doing better than we thought we would do it is elevating bonus for this year.
If we stay on the trends that were on what that creates an opportunity to possibly leverage policy next year. So that's where we sit today.
Got it and then Bob you made some comments in your prepared remarks about.
Cash flows right the cash flow and I know that the authorization to repurchase authorization that you're under his near exhaustion and I'm. Just wondering how do you think about buyback going forward just given the cash flow perspective that you're referencing.
Yeah. So you know we recently exhausted the second of our two recent share buyback authorizations and we gave you all the numbers on that.
And we do expect to end the year with excess cash which is a combination of still some carry forward cash plus what we generated in the fourth quarter.
And as you know, we we don't sit on cash for extended periods.
So the priorities for us or what they have always been the first priority is to fund our organic growth.
And you know we're in the midst of our five year planning, but I think it's fair to say that we anticipate funding.
The the growth of next year's plan really won't.
Being an issue for us. So then the next opportunity for US is to is to grow through acquisition.
And you know the last big deal. We've done was shown to six seven years ago.
And we've looked at a lot of other deals and we've demonstrated I think prudent and disciplined and what we've chosen not to do but we continue to give consideration to a growth down that path with businesses that would fit the other focus footwear strategy that we're employing.
Failing that.
We would return.
Money to shareholders and Weve generally done that or the a share buyback.
Ah So our board regularly reviews all of that our balance sheet, our our opportunities and then our valuation and deciding.
How to deploy cash and so we'll continue to take a look at that.
And so that's just something for down the road for the <unk> worth to consider.
And our final question will come from Laurent Vasilescu with Macquarie.
Hi, Good morning. Thanks. Good morning, Thanks for taking my question and congrats on a strong quarter as well congrats now for your Onboarding.
I wanted to follow thank you next question.
Oh my pleasure I wanted to follow up on Rich's question on August I, obviously, it's qualitative commentary about August Comping nicely can you remind us how August last year performed relative to the third quarter results for asked a different way is the third quarter comp guide embedding we slow down post August is nice performance.
So you know, we really don't call out comps by month, Laura I think we had start we had stated last year that we felt like last year's back to school was well. It was also a good back to school on we had a nice good I'm positive comp in the third quarter last year in the third quarter is it largely back to school. So I mean, I think the important thing to call out is that we are encouraged by our back to school results in its again, some pretty positive results from a from last year August is by far the most important quarter saw the subsequent quarters on the cause of that back to school period, we see we see some sales into September but then it trails off before picking back into October . So you know I think that so far so good on the back to school.
At this time I'd like to turn the call back to Mr., Bob Dennis for any additional or closing remarks.
Well. Thank you everybody for joining us. Thank you for your questions and we look forward to catching up with you at the at the next third quarter earnings release. Thanks All.
And this concludes today's conference. Thank you for your participation and you may now disconnect.