Genesco [GCO] Conference call transcript for 2021 q1
2021-05-27 15:07:10
Fiscal: 2022 q1
Operator: Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2022 Conference Call. Just a reminder, today's call is being recorded. I will now turn the call over to Dave Slater, Vice President of FP&A and Investor Relations. Please go ahead, sir.
Dave Slater: Good morning, everyone and thank you for joining us to discuss our First Quarter fiscal 2022 Results. 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 company's SEC filings, including the most recent 10-K and 10-Q filings for some of the factors, including the impact of COVID-19 that could cause differences from the expectations reflected in that forward-looking statements made during the call today.
Mimi Vaughn: Thanks, Dave. Good morning, everyone, and thank you for joining us today. Our company began fiscal 2022 with positive momentum, following an incredibly challenging year battling the pandemic. In each successive quarter, our people worked with great tenacity and success to improve top and bottom line results to close the gap to pre-pandemic levels, drive the recovery and return to profitable growth. We entered the pandemic year from a position of strength following 11 consecutive quarters of comp sales growth in our footwear businesses. Our overall performance in a difficult environment reflects the strong competitive positions of our retail and branded concepts, the strength of our footwear focused strategy and our success capitalizing on opportunities to bolster these positions. Thanks to the ingenuity and efforts of our people, we exited last year with a solid foundation to build upon. As a result, fiscal 2022 is off to an incredibly strong start with the first quarter that meaningfully exceeded our expectations. Our outperformance was driven by better-than-anticipated results at every division led by record first quarter revenue and profitability at Journeys. Even as the pandemic continued to impact our businesses to varying degrees, the pace of our recovery accelerated each month and overall in Q1, reflecting stellar execution, combined with a temporary boost from U.S. government stimulus and pent-up demand as the economy reopened faster than anticipated. I'd like to begin today by outlining some of the key highlights from the quarter. First, revenue and operating profit exceeded pre-pandemic levels, increasing 9% and 125% respectively over Q1 fiscal 2020, two years ago, even with our stores open for a little less than 90% of the possible operating days in the quarter given closures primarily in the UK and Canada. Next, higher operating profit combined with pre-pandemic share repurchases delivered outstanding Q1 EPS of $0.79, compared with a loss of $3.65 last year and positive EPS of $0.33 two years ago, all on an adjusted basis. And finally, we achieved record first quarter digital revenue and profit as we continue to capitalize on the accelerated shift to online spending. We sustained last year's 64% growth and added another 43% on top of that.
Thomas George: Thanks, Mimi. Q1 results far exceeded both our expectations and last year across the board. For comparison purposes, we believe that comparing to two years ago, our pre-pandemic fiscal 2020 provides the most meaningful assessment of current performance as there is simply too much noise in fiscal 2021's results for drawing informative comparisons. However, looking back at how our business has changed since fiscal 2020, ecommerce has become a larger percentage and our licensed brands segment has become a larger piece of the total as well due to the acquisition of Togast and strong Levi's sales. These changes come with an overall lower gross margin rate due to the impact of direct shipping expense and the expansion of our wholesale volume, which should be more than offset with lower SG&A from these businesses, coupled with the impact of our cost reduction initiative once our business normalizes post-pandemic. While these changes will reshape the P&L, they have a positive impact on operating margins and an added benefit of a less capital intensive business model. Turning back to Q1, I'm pleased to report that the first quarter continued the sequential improvement of our operating results since the onset of the pandemic. Higher revenue in excess of pre-pandemic levels combined with SG&A that remains well-managed, led to significantly higher operating income versus fiscal 2020 and Q1 adjusted earnings per share of $0.79, compared to $0.33 in fiscal 2020. In terms of the specifics for the quarter, consolidated revenue was $539 million, up 9% compared to fiscal 2020, driven by continued strengthen ecommerce, up 144% versus fiscal 2020 combined with strong results from Journeys and licensed brands compared to pre-pandemic levels. We did not provide overall or store comp results in Q1 as our comp policy removes any stores that are close for seven consecutive days either this year or last year and therefore we feel that overall sales is a more meaningful metric. Overall digital sales increased to 25% of our retail business compared to 11% in fiscal 2020, led by Journeys' penetration improvement, Schuh's ability to capture loss store sales online, and J&M's double digit improvement compared to fiscal 2020. License brands revenue was up 122% versus fiscal 2020.
Mimi Vaughn: Thanks, Tom. As I said, the footwear focus strategy we embarked on a couple of years ago is the right strategy for our business and the foundation of our strong performance. Let me briefly revisit the rationale behind this strategy and how it continues to drive results. Across our company, we aspire to create and curate leading footwear brands that represents style, innovation and self-expression to be the destination for our consumers' favorite fashion footwear. Our strong strategic positioning in the specialty consumer markets we serve, close connections with our customers and enduring leadership positions are what makes each of our footwear businesses distinctive on their own and the synergies they share make them stronger together. We're best known for our retail platform, but we have an important and valuable side of our business that successfully owns and licenses brands, giving us another good platform for future growth. Our opportunity to unlock the full potential of Genesco is to accelerate the digital and omnichannel potential in our retail businesses and to meaningfully grow our branded side. We operate in an industry undergoing substantial change with the continued consumer adaption of digital commerce, positioning our company to affect transformational change. We made substantial progress on this in fiscal 2020 and the pandemic despite its challenges was an accelerant to this change. Looking at the retail side of our business Journeys' understanding of teens and unrivaled access to merchandise they want equips Journeys uniquely well to serve this fickle customer and to navigate the shifts that are an advantageous and inherent part of fashion footwear in this market segment. Schuh occupies an essentially identical position in the UK. Both brands have exceptional merchandising abilities and a passionate focus on customer service. Both serve as key omnichannel distribution partners for the current most relevant use footwear brands. Given that they enjoy significant overlap in their vendor basis, their combined scale allows for stronger brand relationships, underscored by activities like joint top-to-top global summit and share special makeup product collections sold exclusively at Journeys and Schuh. Vendor scale along with product and consumer insights provide great synergies as does strategic and operational initiative sharing. A strong example of this is Schuh entering into the kids business and now substantial, profitable and growing part of Schuh by borrowing and leveraging Journeys' know-how and success. The anchor of the branded side of our company is Johnston & Murphy whose leadership position is founded on brand equity that has taken 170 years to build. This heritage, ability to interpret and shape its customers evolving fashion needs through time and establish omnichannel expertise provide a strong foundation for recovery from the pandemic. As a complement to brands we own, licensed brands allows us to leverage our footwork capabilities and expertise across other well-known brands with strong brand equity and opens additional tiers of distribution. Our branded businesses benefit from common wholesale trade relationships and product trend inspiration exchange and in addition, the global sourcing platform spanning across J&M and licensed brands provides some of the most meaningful benefits. For example, licensed brands designs develops and sources product accounting for one-third of the casual footwear sold in J&M factory outlets, including the top selling style, overall. Our branded platform is Genesco's most promising platform for future growth. This platform allows for leveraging of our robust direct-to-consumer capabilities, complemented by well-developed wholesale channel relationships, giving us the opportunity to add additional footwear brands that can plug into this infrastructure and capitalize on today's retail landscape where brands increasingly go direct-to-consumer. Licenses plugged into this infrastructure also add value evidenced by the success we're having with Levi's and the enhanced capabilities Togast added to our footwear sourcing platform. In addition, not only do we benefit from a North American shared services platform in areas like technology, logistics, finance and HR that size and scale matter even more in our now technology and digitally-driven retail sector as the investments to keep pace with consumer expectations continue to grow. While Journeys and Johnston & Murphy go to market as separate and distinctive brands, they share almost all of their retail systems and services, providing significant cost sharing and enhanced benefits. From point of sale software to merchandising systems to loss prevention in real estate, the retail technology and infrastructures of these two concepts are largely integrated. For example, the point of sale software upgrade we're rolling out this year will serve both Journeys and J&M. Likewise, the wholesale technology infrastructures of J&M and licensed brands are significantly integrated as well. As we look to the remainder of fiscal 2022 and beyond, further leveraging these synergies within and across platforms is an important step in delivering increased value on top of the six strategic growth pillars driving our footwear focus strategy. These six pillars put in place prior to the pandemic, emphasized continued investment in our digital and omnichannel capabilities, deepening our consumer insights, driving product innovation and reshaping our cost base. On future calls like the last one, I will provide an update on the significant progress we're making on these six pillars and corresponding strategic initiatives, which are having real impact to driving growth and profits for Genesco. Now to conclude, my genuine thanks goes out to all our people for your diligent efforts to deliver absolutely exceptional first quarter results. Not only have we taken care of our customers and each other during the pandemic, but we began the year on a firm foundation that allowed us to grow and create tremendous value in our company. In addition, over the last several months, we've added four very qualified and experienced directors to our board, whose perspectives will be invaluable as we shape our future. Genesco is on the right path, our strategy is working, our future is bright and I have never been more excited about the people and potential in our business. This concludes our prepared remarks and I'll now turn the call back over to the operator for Q&A.
Operator: Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question is from the line of Steve Marotta with CL King. Please proceed with your questions.
Steve Marotta: Good morning, Mimi and Tom. Congratulations on capitalizing on the tailwind in the first quarter. Very nicely done.
Thomas George: Hey, Steve.
Mimi Vaughn: Thank you, Steve.
Thomas George: Thank you.
Steve Marotta: I want to ask you a little bit about the inventory position versus two years ago considering that it's below two years ago and the pace of sales are as good as they are. I'm assuming you're in chase mode. Can you talk a little bit about when you would expect a little bit more equilibrium between what your inventories are and what you expect demand to be?
Mimi Vaughn: Sure. Steve, definitely the supply chain situation has been challenging. It's not just the ports but transportation from the ports, containers, COVID disruption, has -- it really started with COVID and the supply chains haven't been ready for the consumption to pick up so robustly. It's not a new problem. We have been managing throughout the pandemic with this situation. Our last quarter that we just had, we had some of these issues as well. Basically what happened is that whatever inventory came in went right back out. There was a worse gap to fiscal 2020 at the beginning of the quarter, yet sales were strong. So, we again have been managing through this. So, the good news is things have been getting better at the ports and in the supply chain. We're a very important partner to our brands. They've worked with us a lot to date and this is a lower volume time for us that gives us a bit of time to catch up. We do expect to do a good amount of catching up in the second quarter, which will help with back-to-school. We expect to be in good shape by the end of the third quarter in time for holiday based on what we know today.
Steve Marotta: That's really helpful. And I did want to touch a little bit on back-to-school and holiday overall, as well. Considering that it looks like even summer camps and by that, I mean immediate term are a little bit more normalized, that as far as all indications are from in-person classes, elementary, middle and high schools, as well as colleges will be occurring in the back-to-school season and how abnormal obviously, last year was, you could dream a little dream about how strong back-to-school could be and then obviously dovetail a little bit into holiday. Assuming that there is much optimism internally there as there might be here in my commentary, can you talk a little bit about how you would approach a holiday season in order to maximize sales and market share? Thanks.
Mimi Vaughn: Yes, sure. Look, there are a lot of great pluses out there. GDP growth is good, there's been a huge injection of cash into the economy, there are a lot of savings, employments increasing, COVID cases have been rapidly declining. You can just feel that people are excited to get back to normal. They just feel that America is coming back to life. Back-to-school should be more normal this year than last year. It was completely not normal last year. We gathered a lot of data about back-to-school. We estimated about two-thirds of students attended only virtually. Back-to-school for us starts in late July, we do a significant business in August and then it trails off in September. So, we are really watching to see what the school districts are saying. All school districts have not decided definitively what they're going to do next year, but there's a big push to get back in-person. And so, we think that that is going to be a positive for our business. We also think that there are nice underlying drivers like the enhancements to the child tax credit that's going to start in the middle of July. So, people are going to get payments directly into their accounts and this timing coincides nicely with back-to-school. It's going to continue through right up until holiday. So, it may help with gift-giving as well. And so, we see lots of great signs in our business, we see lots of great signs in the economy. There was a tremendous amount of disruption last year, so the consumer patterns are different. And so we are taking all that into account and are optimistic, but know that there's a lot to come in the back part of the year.
Steve Marotta: Very helpful. I'll take the balance offline. Thanks.
Mimi Vaughn: Thank you.
Operator: Thank you. Our next question is from the line of Jonathan Komp with Baird. Please, proceed with your questions?
Jonathan Komp: Yes, hi. Thank you. First I want to ask on Journeys, maybe separate of consumer demand or ability and willingness to spend. How are you thinking about positioning the assortment? Just looking at how strong Journeys has been and any commentary, the balance of the seasonal summer season here and then how you're positioning the assortment for back-to-school and fall, winter?
Mimi Vaughn: Sure. First of all, I just want to give a shout out to our merchants. They placed the right bets on the right product. They have so much experience just navigating the twists and turns of the teen market and clearly the twists and turns of the pandemic. What we have been seeing in this latest fashion cycle, and Jon, you know we spent a lot of time talking with you about the retro-athletic cycle which was the cycle right before we went into the pandemic. And we started to see last year that there was a real shift into what we call more casual product. I talked about it on the call. We saw casual in terms of sandals, in terms of boots, we saw the propensity of the consumer to shift away from fashion athletic which they always are consuming into a more casual assortment. This is a real positive for our Journeys' business because we're uniquely positioned to serve the customer in the casual assortment. What's interesting right now is that teens are finding inspiration for whatever they are wearing. And just reinterpretations of a throwback style. So, 1980s 1990s, the 2000 fashions, there's a lot of diversity in fashions and styles right now -- Tiktok videos and other social media, teens want to show their individual style and that is just playing nicely into the assortment we have. They're borrowing bits and pieces from what they are seeing and this is translating into just such creativity and such wonderful displays of fashion. And so we expect that's going to continue through back-to-school and back into holiday and casual has grown as a percentage of our business every quarter last year and also in Q1.
Jonathan Komp: Okay, that's really helpful. And then one on just the licensed business. Can you give a little more detail on what's driving the Levi's growth? And then when you look at the license portfolio combined currently, how do you think about the opportunity for the brands that you have currently?
Mimi Vaughn: Sure. We have traditionally in our licensed brands business, we've been at double-digit operating margin with really good return on invested capital. We knew that we needed to add a license as a consumer appeal of some of the licenses that we had in our portfolio had been waning and sales had been shrinking not enough to support our infrastructure and we've been searching for the right opportunity for some time. So, Levi's clearly just an incredible iconic brand name with a tremendous amount of heritage was the right opportunity for us. This Togast acquisition added to our overall sourcing capabilities. We were able to get some infrastructure to add on to the infrastructure that we have right now that allows us to hit some different price points and allows us to hit some styling that we couldn't otherwise hit. So, we like what we're seeing so far. The pandemic delayed our ability to capitalize on this investment, but the first quarter and the strength of the sales and the bottom line, I think show where the opportunity is and we acquired a few other licenses and I think the infrastructure exists for us to plug additional licenses into. So, I'd asked Tom, if he would add anything to this opportunity.
Thomas George: Jon, I would say we're excited about this opportunity. It's a good driver of return on invested capital. It's a very asset-light model. The arrangement we have a Togast provides a lot of capabilities from a sourcing point of view. So, we're doing well with that business. We've got a strong order book and we really like how that's progressing.
Jonathan Komp: Yes, great. Just one more, Tom, if I could, thinking about first half performance here. If I'd back out some of the one-time benefits you highlighted. It looks like operating margins still trailing fiscal 2020 in the first half. So, how should we think about maybe the full year getting back to that 4.5% operating margin level you had for the full year of fiscal 2020 and then growing from there?
Mimi Vaughn: Yes. So Jon, I think that we're clearly not out of the pandemic and there are a couple of our businesses, Johnston & Murphy and Schuh in particular that would not have been operating at full strength during the first quarter. And so when you think about it, Schuh stores were open for only 20% of their time and yet, in spite of that, the strength of digital was so good that we almost met fiscal 2020's sales level. So, you can imagine that there is just more to come with the opening of stores and continued strength of the digital business. And then Johnston & Murphy, we've talked also about the fact that consumer went into hibernation. And so, we were very pleased to see how much that business grew and strengthened over the course of the first quarter. It's going to take a little bit of time. I think that that is largely some of the drivers that give us the opportunity going forward and fortunately, the strength of Journeys and licensed brands were able to even overcome the time that we need for those businesses to recover and deliver a very strong first quarter performance. And so, I'll ask Tom to add to that.
Thomas George: Yes, I think I don't have much more to add to that. That's a great, great summary of what opportunity we see going forward and continue to improve our operating margins. We talked about the license brands business, there's further opportunity to improve the digital penetration with Journeys. We like where the competitive positions, both Journeys and Schuh have in their marketplaces. We see further opportunity to improve the margins that Schuh into the Johnston and Murphy. I think we got the right team in place here to be able to recover from the pandemic and we've got some good items at Johnston & Murphy that are getting a lot of traction and they're selling well. So, we liked the opportunity and the ability to have our Johnston & Murphy business recover. And keep in mind, it's a branded business so we have that better margins, we already have the omnichannel distribution strategy put in place. So, we see a lot of tailwinds in place for us to be able to start improving our operating margins.
Mimi Vaughn: Yes and I think that to have imagined, we could be back to the pre-pandemic operating margin levels. So quickly, is something that is certainly within our line of sight more so because of how quickly the economy has opened up. I think when you think about our overall formula for profitability, we talked on the call about a great opportunity for growth in our digital business, which has healthy double-digit operating margins and a chance to get even better with size and scale. The opportunity to reshape our cost structure in our store channel, we had signed up for rents that were outsized given the shift to online and the pandemic's disruption to retail along with a significant number of our leases coming up for renewal as Tom talked about, 40% of our leases coming up for renewal, has given us a chance to reduce rents even faster, which is the most important part of reshaping our cost structure. And so when you think about our ability to get to pre-pandemic levels and perhaps beyond, those are the real drivers. And the bottom line is that we mostly believe that that opportunity exists because of the competitive strength of our businesses that we've discussed.
Jonathan Komp: It's all are very helpful. Thank you very much.
Operator: Thank you. At this time, we have reached the end of the question-and-answer session. Now I'll turn the call over to Mimi Vaughn for closing remarks.
Mimi Vaughn: Great. Thank you, everybody, for joining us today. We hope you have a great holiday weekend.
Thomas George: Thank you.
Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
