Genesco Inc. 2027 Q2 Earnings Call

Please go ahead, sir. Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal 2027 results.

During today's call, participants expect to make forward-looking statements that reflect our expectations as of today, and actual results could differ materially. Genesco refers you to this morning's earnings release in the company's SEC filings, including its most recent 10-K and 10-Q filings for some of the factors that could cause actual results to differ from the expectations reflected in the forward-looking statements made today. We 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've also posted a presentation summarizing our results there as well.

With me on the call today is Mimi Vaughn, Board Chair, President, and Chief Executive Officer, and Jonathan Collins, Senior Vice President of Finance and Chief Financial Officer. Now I'd like to turn the call over to Mimi.

Thanks, Darryl. Good morning, everyone, and thank you for joining our second quarter fiscal 2027 earnings call. Before I get into our results and progress on strategy and initiatives, I'd like to start by welcoming Jonathan Collins, who joined Genesco in early August as our Chief Financial Officer. Jonathan brings more than 30 years of exceptional financial experience. His senior leadership roles in major global retail and e-commerce businesses include CFO of Walmart Africa and CAO of India's Flipkart Group, and he was most recently Chief Financial Officer of America's Car-Mart. Jonathan's public company leadership, multi-channel retail experience, and capital markets expertise make him a strong fit for Genesco as we continue executing our footwear-first strategy and generating shareholder value. I'm confident he'll be an excellent partner to me, our leadership team, and the board as we drive our next phase of growth. Welcome, Jonathan. Jonathan's arrival, along with our appointment of Tomas Petersson as President of Schuh following Colin Temple's retirement, which I'll touch on in more detail shortly, reflect our strong belief in the direction we are headed and our determination to keep accelerating our progress.

Turning now to Q2, I'm very pleased to report that we delivered bottom-line results that were significantly better than last year and well ahead of our expectations, with every business achieving gains versus plans. The quarter once again highlights that our strategy is working and our momentum is building. We've been taking considerable action to respond to changes in a dynamic consumer environment and successfully evolve our business, and Q2 provides clear proof of our continued progress. Earnings improvement came from strong execution evidenced by higher gross margin recapture, more full price selling, higher ticket and conversion, better store productivity, and more disciplined expense management.

This is the earnings leverage we set out to build this year, and we're increasingly confident that it reflects positive structural improvement for a higher quality, more profitable business. While we did in Q2 receive a substantial portion of the tariff refunds we applied for, which Jonathan will detail later, this is not included in the adjusted numbers we are reporting. Our sharp execution drove meaningful earnings improvement even in this lower volume sales quarter and with a lower sales base. As anticipated, the decline in sales was driven by three shorter-term headwinds tied to strategic actions we're taking to improve our business. Namely, continued store closures as we optimize our fleet, the license transition ahead of the Wrangler launch, and our intentional pullback on discounting and promotional activity at Schuh. These actions are in pursuit of a healthier, more profitable business over time.

As we move past these events, we expect sales trends will improve, and we remain confident the consumer-facing initiatives underway position us well for future growth. Importantly, both Journeys and Johnston & Murphy posted positive comparable sales in the quarter, continuing their ongoing streaks of consecutive gains with the overall company comp reflecting the reduced discounting at Schuh and corresponding impact on sales. The consumer backdrop has not changed materially from what we described last quarter. Our customer remains selective and intentional. They shop with purpose when there's a reason, and they don't when there's not, and they're willing to pay up when we deliver the right product. What continues to stand out is that compelling product and newness are winning. We have the right assortments, our customer is responding and notably buying at full price. The back-to-school read in Q3 so far is another encouraging example.

After a robust spring selling, the consumer turned attention, as usual, to summer activities other than shopping. Since then, Journeys has accelerated to a mid-single-digit comp in August on top of its second most challenging, well into the double digits monthly two-year stack Johnston & Murphy has also seen a notable uptick in interest in its recently dropped fall offering.

This gets us off to a good start for the back half. Our goal is to extend the momentum of the last year and a half and continue to gain market share even as footwear industry dynamics remain challenged. With that, let me now provide more color by business on the second quarter and the actions underway to deliver the back half, starting with retail. In Q2, Journeys delivered its eighth consecutive quarter of positive comparable sales on top of strong growth a year ago, extending the positive transformation story for the style led team that is one of the most important proof points of our strategy. Both store and e-commerce comps were positive.

Journeys merchant team continues to do an excellent job building on its elevated assortment across athletic and casual, achieving higher transaction size, more full price selling, and better conversion again in the quarter. Product strength remained broad-based across franchises and brands, including lifestyle running, sandals, and low-profile athletic fashion with momentum in newer brands and fashion trends such as Mary Janes and sneaker ballerinas. Ultimately, athletic lifestyle led to growth over the summer, where Journeys demonstrated its ability to drive market leadership in several franchises important to its target teen customer. Our 4.0 rollout remains a major driver, with the new format continuing to deliver in excess of a 25% sales lift. We opened 25 locations in Q2, bringing our total for the year to almost 50. What is most noteworthy about the quarter beyond the positive comps is Journeys delivered a meaningful 180 points of expense leverage.

The productivity of these 4.0s continued fleet optimization, impactful cost reduction actions, and a new approach for selling salary efficiencies all contributed. This leverage, combined with more modest comp growth and roughly flat sales due to closed stores, drove the nice improvement in operating income, positioning Journeys well for profit gains outside of a robust shopping peak. While our back-to-school business got off to a later start due to the Labor Day calendar shift, sales trends accelerated, boosted by our Life On Loud campaign as we got into the season, especially during tax-free periods with customers looking for budget relief. As I mentioned, Journeys is comping nicely positive against record back-to-school results last year, especially in larger, more premium shopping centers and in major states like California and Texas. Turning now to Schuh. Our reset is squarely about restoring better economics over time, and this quarter's results show that work is taking hold.

To oversee this next phase of the turnaround, we named Tomas Petersson President of Schuh in late July. Thomas succeeds Colin Temple, who is retiring after a remarkable 38-year career with the business, including the last 15 years as president. I want to thank Colin for his extraordinary contributions in building Schuh from the start into one of the U.K.'s leading footwear retailers, and for his partnership in getting the reset work off the ground. Thomas joins us from Foot Locker, where he most recently served as the geographic leader and general manager for Europe, Middle East, and Africa, leading Foot Locker's largest international business. He brings extensive global leadership experience across multi-branded footwear retail and footwear brands with a focus on youth culture.

Thomas is reporting to Andy Gray, head of our Journeys Global Retail Group. We have every confidence that his U.K. and international experience and track record growing profitable retail businesses make him the right leader to quickly build on the current progress. His skill set and experience are an exceptional fit for Schuh. Welcome, Thomas. Now back to Q2. Schuh's gross margin improved 300 basis points over last year as we prioritized full price selling over discounting and promotions with a full price mix increasing by 10 full percentage points of overall sales. Greater than expected gross margin improvement, combined with extensive efforts to improve the cost structure, including 6 store closures in the quarter, selling salary efficiencies, and digital marketing optimization, among others, drove nearly flat operating income year over year despite lower sales.