Genesco Inc. (NYSE:GCO) Q3 2024 Earnings Call Transcript
Genesco Inc. (NYSE:GCO) Q3 2024 Earnings Call Transcript December 1, 2023
Genesco Inc. misses on earnings expectations. Reported EPS is $0.57 EPS, expectations were $0.84.
Operator: Good day, everyone, and welcome to Genesco's Third Quarter Fiscal 2024 Conference Call. Just a reminder, today's call is being recorded. I will now turn the call over to Darryl MacQuarrie, Senior Director of FP&A. Please go ahead, sir.
Darryl MacQuarrie: Good morning, everyone, and thank you for joining us to discuss our third quarter fiscal '24 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 it's most recent 10-K and 10-Q filings or 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 the schedules available on the company's website in the Quarterly Results section.
We have also posted a presentation summarizing our results here as well. With me on the call today is Mimi Vaughn, Board Chair, President and Chief Executive Officer; and Tom George, Chief Financial Officer. Now I'd like to turn the call over to Mimi.
Mimi Vaughn: Thanks, Darryl, good morning, everyone. And thank you for joining us. Before I discuss third quarter performance, earlier this week we announced the appointment of Andy Gray as Journeys New President. Andy is an exceptional and experienced leader who brings invaluable expertise in brand building, product innovation, and the other areas essential to building Journeys business for the future. Andy's connection to youth culture and the strong brand relationships he's built over his accomplished career make him the ideal person to lead the talented team we have in place at Journeys, as we work to elevate the business and unlock the great potential we see ahead. I look forward to his partnership, and I'm excited for him to join recently appointed COO, Mike Sypert to drive success going forward.
Welcome, Andy. Now moving to results. Following a later start to back-to-school, sales picked up early in the third quarter and were generally tracking to our expectations. However, we saw a market change in trend in October as the later change of seasons muted initial demand and delayed the start of the selling season for fall products. In addition, our branded businesses were impacted by disruption related to the implementation of a new ERP system, contributing to lower overall results than we anticipated for the quarter. Despite these headwinds, we were pleased that sales trends within our Journeys business continued to show sequential improvement, and Schuh and Johnston & Murphy delivered record third quarter sales. The operating environment remained challenging as ongoing inflationary pressures and economic uncertainty continued to impact discretionary spending.
As we've seen throughout this year, consumers continue to make tough choices on where to spend their dollars, often choosing other categories over discretionary purchases. And when they do shop, they're doing so closer to need and are carefully discriminating in their purchase decisions. Against this backdrop, we continue to advance our strategies to drive consumer demand and make the business more productive and more profitable. Our Journeys store closure plans are on track, having closed 75% of the approximately 100 doors planned through the end of Q3, and the remainder targeted to close by year-end. We also remain on pace with efforts to realign our cost base and realize $40 million of annual cost savings by the end of fiscal '25. Finally, we once again maintained strong inventory discipline in Q3, with total inventory down high single digits year-over-year.
Other key highlights from Q3 included growing our overall comparable digital business by 8% and expanding digital penetration to 21% versus 18% a year ago. We launched Buy Online Pick Up in Store at Journeys and J&M in October to quite promising early results, offering additional convenience and time for the holidays as we continue advancing our omnichannel experience. And finally, Journeys all access loyalty program is off to a strong start, performing well against our high expectations. Now discussing our individual businesses in more detail and starting with Journeys, the negative sales trend we experienced through the first half of the year continued to sequentially improve in Q3. Back-to-school trends we discussed in late August accelerated into September, and the changes our merchants were able to affect across the product mix resonated well, enabling Journeys to outpace our most recent expectations.
Sales of must-have items were strong, and we continue to chase into that product. Even though this wasn't enough to offset the lack of newness and industry discounting in athletic or the unanticipated late start to fall selling, Journeys traffic and conversion nonetheless improved considerably versus Q2. In quarter-to-date, I'm pleased to say that Journeys comp has shifted into positive territory for the first time this year, driven in part by a strong Black Friday weekend. Although the environment remains volatile, consumers are responding well to the newness we and our brand partners have injected into the product assortment. We're excited to amplify the Journeys story through our holiday campaigns, which among other things will feature more SMS campaign usage and increased investment in digital marketing, as well as new campaigns and rewards for all access members.
Now moving to the U.K., despite facing the consumer pullback in October, Schuh delivered the strongest constant currency in third quarter sales to date, reflecting our efforts to enhance its customer value proposition and access to top-tier products. Solid double-digit sales growth and a 5% comp were driven by a compelling back-to-school assortment led by the kids' business, followed by women's, adding to the outstanding performance Schuh has achieved this year. Schuh accomplished this through growth of casual products, aided by higher average selling prices and success in non-footwear categories like backpacks. The delay in change of seasons and resulting pressure on sales later in the quarter was most pronounced in stores, as Schuh's digital business notched positive gains throughout Q3 and continues to account for nearly 40% of total sales.
Schuh's growing strength and recognition as the leading fashion footwear destination for the youth consumer has been driving market share gains. As of mid-October, Schuh ranked number 10 in U.K. footwear market share according to Kantar maintaining its position after moving up three spots earlier in the year. Loyalty continues to bolster this effort tracking at about 30% of Schuh’s Q3 sales. Total Schuh club members now stand above 2 million and counting with members more highly engaged and purchasing more frequently. Schuh is running exciting holiday campaigns through the season to surprise and delight customers including bundle promotions and digital content tied to its loyalty program. Turning now to Johnston & Murphy, the brand added to its strong run this year posting positive sales growth and record third quarter sales despite a unique set of headwinds and a tough multi-year compare.
While the challenges J&M encountered from the new ERP system implementation led to some lost sales in Q3, this more robust modern platform provides greater agility to support J&M growth and the growth of our other branded business. J&M was also not immune to the broader consumer pullback that hit in October and stole sales of outerwear and other fall products. Casual continue to drive results accounting for over 75% of direct-to-consumer footwear sales. Apparel was a bright spot growing 7% and together with accessories now accounts for over 40% of J&M DTC sales. We're benefiting from the all-encompassing changes we made coming out of the pandemic to reposition the business as a more casual multi-category lifestyle brand. Supporting this effort is J&M insiders affinity program.
Insiders now account for approximately 60% of J&M DTC revenue with over 60% of new customers joining the program. Looking ahead we remain very positive on J&M's longer-term potential and are investing against it. As part of this next phase of growth, J&M has partnered with a new creative agency to unlock the significant opportunity to increase its brand awareness which currently stands at only 35% and educate consumers about the shift away from its heritage dress Schuh legacy. This new top-of-the-funnel marketing launches in it's spring as we expand our marketing reach to broader range of customers. Now turning back to Journeys, we're pressing forward with our Elevate Plan which leverages the elements of our footwear focus strategy and drives action to meaningfully accelerate Journeys improvement and top-line growth.
Journeys has a proven track record of managing through adverse cycles responding to changing consumer and fashion dynamics and coming out stronger on the other side. The fundamental tenets of Journeys value proposition to customers remain intact. With our focus on fashion footwear and compelling mix of and access to top brands no other retailer serves the team consumer quite the same as Journeys. While we have much more to unlock as we finish this year and get into fiscal '25 the work we've done today is paying dividends. Today, I'll highlight the key areas of our plan where we're making good progress. Number one, strengthening customer engagement and expanding relationships with our target team customer. Initial results from the all-access loyalty program are very encouraging with roughly 1.5 million members signed up since launching in July.
Members are already buying more often than non-members and spending more per average order. With considerable runway ahead of us we're just beginning to maximize our CRM and loyalty data to more strategically target customers based on purchase history and brand preferences. During Q3 we ran integrated campaigns focused on key brand partners to elevate Journeys as the destination for these top brands. These included all access tie-ins in store presence home page -- homepage presence and social call-outs. Number two, elevating product and strengthening our brand relationships. We've been working diligently with our brand partners to add more differentiation to the Journeys assortment increase our access to the most in-demand brands and styles expand the number of exclusives and test new brands which would add new dimension to the assortment.
But more than that we further focus the partnership conversation on a strategic view that reinforces Journeys value proposition and unique position in accessing the coveted team customer. While fully repositioning the assortment will take some time. We've made good progress that we will build upon for upcoming seasons. And number three, sharpening Journeys brand marketing. Our customer insight work also informed us that while Journeys is top of mind to consumers for certain brands we carry, we have the opportunity to increase mindshare for all the leading fashion brands we sell. We're applying those learnings to drive stronger awareness and strengthen Journeys voice across social channels. We increase paid social investment for back to school and are doubling down our efforts for holiday.
Number four, implementing incremental initiatives to drive digital and omni-channel growth. We recently launched by online pickup in store across the Journeys fleet to a strong initial response. We're encouraged by what we're seeing at this early stage in terms of customer adoption and attachment rates when customers Pick-Up in store. Although small in total right now these add-on purchases are driving a meaningful lift in AOV. We're excited to see how Bopus continues to evolve in our full-service environment. Beyond Bopus as part of our effort to grow Journeys digital business we've also raised product SKU counts on our website and expanded our dropship partners to more than 50. And number five, optimizing our Journeys footprint and driving productivity and efficiency.
We've implemented key learnings from our store time studies that are having a positive impact on conversion and productivity. These include shortening the time it takes to get Schuh from the stockroom and eliminating unproductive daily processes. Our new point-of-sale hardware and software are also generating additional operating efficiencies and contributing to higher average transaction size. Regarding the store closures I mentioned earlier, we expect to achieve annualized savings of about $25 million which is in addition to the $40 million of annualized cost savings we're targeting. Given that we need very little sales transfer from those stores to achieve a break-even operating income we're deploying customized communications to direct consumers to online or to nearby stores.
To sum it up, we're pleased with the progress we're making with the Journeys Elevate Plan and the ongoing improvement in comp sales. The team has worked hard this year to adapt to the dynamic shifts and challenges in the market. I have strong belief in our abilities to address these challenges and in a much stronger Journeys future. Now moving to our outlook. As we entered the fourth quarter, we saw an acceleration in all selling and positive store traffic with the arrival of more seasonable weather. And following a strong start to the holiday season I'm pleased to say our total company comps are currently running positive quarter to date. In addition to Journeys strength J&M experienced record online demand and its best thanksgiving weekend to date.
Leaving us more confident we are on the other side of the pullback of October. That said the environment remains choppy and footwear promotions were even more widespread than we anticipated over the holiday weekend. In response we've made the strategic decision to increase promotional activity going forward especially at Journeys over the holidays to drive sales in this competitive environment. The resulting margin impact is reflected in our revised guidance for which Tom will provide more details. We're largely a non-promotional retailer and plan to stay that way but believe this is a moment in time and these actions are appropriate for this season. Before closing, I'd like to thank all our amazing people across our company for your hard work and dedication through this challenging environment.
I appreciate your efforts throughout the year but especially heading into the busy holiday season when I'm certain you'll raise your game to an even higher level. As we look forward I'm very encouraged by the many initiatives that are driving meaningful progress the strength of our brands and retail concepts and the strategies were executing that will show the resilience of our business. And with that I'll pass the call over to Tom.
Thomas George: Thanks Mimi. Our third quarter financial performance not only reflects the challenges and hurdles we faced but also the progress we continued to make. As we now round out the fiscal year and begin to look to fiscal '25 we believe our solid foundation and increased efforts around financial discipline will position us to drive stronger results. Turning to our results for the quarter consolidated revenue was 579 million down 4% compared to last year and down 5% on a constant currency basis, mainly driven by the sales to client Journeys. Relative to our expectations better sales transit Journeys were offset by lower than expected sales and associated deleverage on expenses in our branded businesses and Schuh. Total comps were down 4%.
Although still negative we were pleased to see another sequential improvement in the trend Journeys. Meanwhile comps at Schuh and J&M remained positive despite the later seasonal transition and our branded businesses dealing with its ERP conversion challenges. By channel total store comps were down 7% while direct comps were up 8%, by business Schuh total comps increased 5%, J&M total comps increased 1% and Journeys total comps were down 8%. Overall gross margin was in line with our expectations, down 60 basis points as compared to last year. By business Journeys gross margin was down 110 basis points mostly due to the expected increase in promotional activity including introductory coupons for Journeys loyalty program along with some next shift.
Schuh gross margin was up 100 basis points as the division benefited from reduced duties from its new Ireland based distribution center as well as a more elevated product assortment mix. J&M's gross margin was down 210 basis points due to a more normalized markdown and closeout cadence versus last year. J&M had much more inventory available to sell this year versus last as much of last year's product was caught in transit. Finally Genesco brands group gross margin was up 270 basis points as we continue to benefit from lower freight and logistics cost and price increases. Adjusted SG&A expense was 46.2% of sales an increase of 190 basis points over last year with most of the deleverage driven by the lower Journeys sales. In absolute dollars SG&A expenses were flat to last year.
In line with our strategic pillar to reshape the cost base to reinvest for future growth we have gained traction with our cost savings initiatives while at the same time increasing the variability of our expense base. This resulted in reduced occupancy, selling salaries and other store costs and enable us to invest in marketing which drove increased sales. In addition we invested in systems and people to drive our business forward which resulted in increased appreciation in IT compensation for new technology initiatives. Lowering overall occupancy costs and reducing the amount of fixed expense in the store channel remains a key priority. In Q3, we achieved a 16% reduction in straight-line rent expense on 59 lease renewals across the company.
With an average term of approximately 3 years. This brings our year-to-date renewals to 155 with over 50% of our fleet still coming up for renewal in the next couple years, we have a lot of runway to capture additional savings. While we have been making nice headway on rent savings and savings on selling salaries increasing wages continued to be an area of challenge. All told in an environment where these and other cost pressures have been prevalent and ubiquitous we were pleased to hold our SG&A dollars flat to last year. In summary for the third quarter we realized adjusted operating income of $11 million compared to adjusted operating income of 26.3 million for Q3 last year. This all resulted in adjusted diluted earnings per share of $0.57 for the quarter versus earnings per share of a $65 last year.
Relative to our internal expectations the extent of the ERP disruption coupled with a higher than expected tax rate had a large impact on this lower EPS result. Turning out a capital allocation in the balance sheet as expected we ended the quarter in a net borrowing position. Regarding inventory we were very pleased to keep our inventory levels well controlled down 8% year-over-year with respect to Journeys specifically we continue to work with our brand partners to adjust receipts enabling us to end the quarter with inventories 14% lower than last year and more fully positioned with the newness we've needed in the assortment. Schuh inventories increased compared to last year to support the higher levels of demand in the business now although J&M's inventories were down versus a year ago as I mentioned a significant amount of last year's inventory was in transit and unavailable for sale.
Overall we expect to end this year with inventory down high single digits versus last year as we continue to thoughtfully manage our assortments and keep our inventory position clean entering fiscal '25. Capital expenditures in Q3 were $15 million with the investments primarily directed to retail stores in our digital and omni-channel initiatives. We opened five stores which were primarily off mall and in outlets and closed 20 ending the quarter with 1360 total stores. Lastly, we didn't repurchase any shares during the quarter and our current authorization remains at $52 million. Over the past 5 years we repurchased almost 50% of our outstanding shares. Regarding our cost savings initiatives we are working diligently to deliver the annualized run rate of up to $40 million in cost savings by the end of fiscal '25.
We expect savings from reduced store rents lower corporate shared services and Journeys central expenses selling salary productivity gains, reduce warehouse and logistics cost and reduce freight costs from omni-channel inventory location optimization initiatives. When you combine our efforts to increase the variability of our cost structure along with progress on our cost savings plan we are on pace to achieve approximately $20 million of cost reductions in fiscal '24. With respect to store closures we closed 74 Journeys stores to the end of Q3 or roughly 7% of a total fleet since the beginning of this year. These were primarily mall based locations. As Mimi mentioned the savings from the hundred Journeys stores we aim to close by the end of the year eliminates roughly an additional $25 million in costs from SG&A expense which on an annualized basis will begin to benefit us in fiscal '25.
The goal of these cost savings and store closure programs is to achieve expense leverage and drive operating margin expansion on more modest increases in sales growth. Now turning to guidance. Overall sales trends have accelerated nicely thus far into Q4 in part due to positive adjustments we made several months ago to the product assortment that given product lead times are having impact now at Journeys. However, the variability and consumer demand we see week-to-week coupled with the heightened promotional activity at the start of the holiday season has led us to take a more promotional stance going forward. Especially to drive demand at Journeys and remain competitive in this environment. While we expect this to positively impact sales, it will also result in some additional gross margin pressure.
We now also expect growth at Schuh to be somewhat more muted than our prior expectations given the softer consumer trends of late. And we expect the ongoing lack of visibility in the wholesale channel to put some pressure on J&M and our other branded business. Combining all these factors we now expect full year total sales to decrease 1% to 2% versus our prior expectations of down 2% to 4% excluding the 53rd week, which we expect to add approximately $25 million of sales and have a small negative effect on earnings per share. We expect sales to decrease 2% to 3%. Some color by division on the total year-end sales compared to last year, for Journeys we continue to expect a high single-digit decline. For Schuh we continue to expect low double-digit growth.
For J&M We now expect high single-digit growth and for Genesco brands a low double-digit decline. We now expect gross margin to be down 40 to 50 basis points compared to our prior view for fiscal '24 gross margin to be flat to down 20 basis points. The change in our guidance is driven primarily by increased promotional activities and Journeys going forward in the fourth quarter as well as products product makes shift. We now expect adjusted SG&A as a percentage of sales to do leverage 200 to 220 basis points compared to our prior view of 220 to 240 basis points of deleverage. Given our key three actual results and revised assumptions for Q4 we now expect full year adjusted earnings per share of $1.50 to $2 compared to our prior range of $2 to $2.50.
Our expectation is that we will be near the midpoint of this range. Our guidance assumes no additional share repurchases which results in fiscal '24 average shares outstanding of approximately 11.4 million and we expect the tax rate to be approximately 24%. To close we continue to take the necessary measures to navigate the current consumer environment while also proactively evolving our company towards a leaner and more agile state to better meet the needs of our consumer, drive stronger profitability and ultimately deliver greater returns to our shareholders. Operator, we are now ready to open the call for questions.
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