Welcome to the Genesco First Quarter Fiscal 2018 Conference Call. Just a reminder, today's call is being recorded. The company expects to make forward-looking statements. These statements reflect the company's expectations as of today, but actual results could be different. Genesco refers you to this morning's earnings release and to the company's 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. The company also expects 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 morning's press release and in schedules available on the company's homepage under Investor Relations. I will now turn the call over to Bob Dennis, Genesco's Chairman, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone and thank you for being with us. I'm joined today, as usual, by Chief Financial Officer, Mimi Vaughn. The first quarter top line played out close to how we planned for the company in terms of total sales with comps down 1% at the low end of the range. And as anticipated, comps experienced wide swings over the course of the quarter. Following a very challenging February in the U.S. due to the IRS delay of income tax refunds, sales trends improved in March until the Easter offset at the end of the month. While the Easter shift benefited April which was by far the strongest month of the quarter, sales in our U.S. businesses were more challenged than we expected in total for the quarter offset in large part by stronger sales in the U.K. Another important variation from our expectations is that sales were more concentrated in digital. While overall comps were down 1%, store comps were down 4% and direct comps were up almost 30% which included double-digit comps in almost every business. Although we're very pleased with these strong direct comps as a measure of success in the omnichannel investments we have made, the lack of traffic in the mall causes our store fixed expense base to deleverage and hurts profitability. Adjusted EPS of $0.06 was only a few cents below our internal estimates for the quarter, but well below last year's level. We said on our last call we expected Q1 to be very challenging for earnings to be substantially less due to negative comps at Journeys from the fashion rotation, gross margin pressured both Journeys and Lids, deleverage from soft comps and spending at Lids to fund initiatives that paid back later in the year and beyond but will be dilutive…

Thanks, Bob. Good morning, everyone. As a reminder, we have posted more information online, as usual, in our CFO commentary. Beginning with sales, mall traffic was off at the start of the quarter because of the delay in income tax refund. When refunds are early, the customer has money to come back into the mall soon after holiday and then comes again to buy spring and Easter merchandise. With later refunds, we believe we largely missed the opportunity for these early sales altogether which especially affects Journeys and Lids. For Q1, total sales decreased 1% to $643 million. Excluding last year's sales from SureGrip which we sold in December, total sales were flat for the quarter. This includes the 1% decrease in consolidated comp sales and a 23% increase in wholesale sales. Sales this year were also impacted by foreign exchange with the pound devaluing versus the dollar. Without the devaluation, we would have had a 1% sales gain. In Q1, positive comps at Schuh and Lids were offset by negative comps at Journeys and J&M. Building on Schuh's positive comp growth at the end of Q4, must-have fashion athletic product drove robust 10% comp in Q1 with strong increases in women's and children. Considerably better conversion and higher transaction size made up for part of the weakness in mall traffic in Lids stores, but it was the higher digital sales that resulted in a 1% comp overall. Sales were strong in the Locker Room business in both the U.S. and Canada, driven by a solid jersey trend and by Canadian teams winning multiple spots in the NHL playoffs after missing out completely last year. Headwear, as an impulse purchase, is most affected by mall traffic and comps in the hat business were weaker as a result. Comps at Journeys…

Thanks, Mimi. I want to briefly reiterate the major initiatives we were working on that span all of our operating companies, as they are key to meeting the challenges of the current retail environment and capitalizing on the strategic strengths of our businesses. Declining traffic has been a recurring theme in the Q1 reports of most mall-based retailers in the sense that the consumers appetite for buying online may have reached another tipping point and it has been featured in a lot of recent commentary. Our own first quarter experience does not provide any evidence to the contrary. Our guidance for the balance of the year reflects the assumption that this greater shift to digital represents the new normal and we're taking a number of strategic steps to strengthen our position. These initiatives are consistent with what I outlined on our last call. With that said, I'll talk about them again in order of what is most urgent. And they are, first, reducing our real estate risk and managing rent expense; second, enhancing our in-store experience; third, building out omnichannel and digital capabilities; and finally, increasing our use of social media to strengthen the equity of our retail brands. So starting with real estate. This initiative is more important than ever with the rent deleverage we have been experiencing and the reality of additional retail store closings and we're redoubling our efforts here. We carefully evaluate each lease that comes up for renewal, shortening lease life where it makes sense, in C malls, in particular. In general, we keep stores open when the landlord agrees to a rent deal in which we can make a decent profit and today, we have roughly similar 4-wall percent profitability across A, B and C centers because of this. But we're managing that risk…

[Operator Instructions]. And we'll first move to Erinn Murphy with Piper Jaffray.

I was hoping you guys could talk a little bit more about Journeys and just the fashion transition there. The comp, obviously, missing kind of its plan. I think you talked about declining part of the business, obviously, worse than you anticipated. Can you just help us think about if you look forward, when do you start to see that normalize? It seems like you are getting better allocations in the stores with the new products but clearly the balance isn't there yet. So any help on kind of back-to-school? Anything as you think about the visibility there? And then I guess just related to that, you did mention, I believe, quarter-to-date, is tracking better in May led by Journeys? So maybe just expound upon that, what's really driving that?

Yes. So Erinn, we're getting big gains in all of the new styles that we have brought in and we're very pleased with the allocations we've gotten for the most part. And so what we highlighted is that at some of the brands that were -- our rock for the recent years of success came down a little more than expected. They're still -- they're very big sellers. And as usually is the case, a hot brand declines, but it never really goes away. But these brands have not found their bottom. We're hoping that when they lap the beginning of their decline which is really late June and in July, that they'll start to find the bottom. But we're, obviously, we're not comfortable guiding off of that given what we've seen year-to-date. And then importantly, these brand partners of ours, they're not standing still. They are working both the product side and then they're investing in their marketing efforts to try and be helpful. And so we're also hopeful that those efforts will pay off. But once again, we're not really ready to take that to the bank. Some good news is ASPs are up because what is new is the higher price point. And as Mimi noted, I'll just emphasize that the inventory growth, because we brought in a lot more of the hot new products, we feel like we've got, basically, 12 months product that we need to work down in a lot of the legacy brands. And so we don't think we have markdown exposure. But the beginning of May, look, we're 3 weeks in. Traffic has got better, comps responded and got better at the same time. But as you know, weather broke nicely in early May. And so some of that can be weather-driven. We just got such difficult traffic numbers in the first quarter that we think that, that is something that we need to continue to be mindful of and not necessarily assume that, that's over. And then the other shift, obviously which we called out is this heavy shift to digital. Our -- the teenage customers still tells us that they like to shop the store but the numbers don't lie. And so we've had a dramatic shift in this quarter to digital sales. And we think to some extent, that's expensive to stores and that deleverages. Mimi, anything you want to add to that?

Yes. So Erinn, just to talk a little bit about the timing of the Journeys recovery. Initially, we thought that as we hit the second quarter that just given how well the new styles were performing that we would be in positive comp territory. We now think that we're -- in the second quarter, we will be flat to down a little and that will be quite a good improvement from the first quarter. But the second quarter is just a low selling period, kids get out of school, they're thinking about summer. They are not really building their wardrobe. When we get to back-to-school and in holiday, when we have a chance to inject just a lot more product into -- a lot more of the newer product into the assortment, we anticipate that comps will turn positive and will build momentum as we go through the back part of the year to be positive for back-to-school but then also for holiday at a greater level.

The next question comes from Pam Quintiliano with SunTrust.

The traffic declines, can you talk about what you're seeing the magnitude versus what you're hearing is happening in the mall overall? In the past, even when there have been declines in traffic, you just kind of held on your own and then incrementally, better. I was just wondering if we're still seeing that in this really challenging environment? And then what do you think -- Bob, you mentioned it was the tipping point this quarter. So what do you think really changed with the consumer that made it the tipping point? You just mentioned weather quickly, but is it weather? Do you think at Journeys, in particular, we've heard that there's not a lot of new women's fashion out there in the marketplace. Do you think that hurt on the footwear side in addition to just transitioning away from some of your older styles to your newer ones? Just any insights that you can provide on why it happened now? And then even though you're seeing these improvements in 2Q, why you think this is going to continue on the trajectory?

Well, first of all, I didn't call it a tipping point. I'm just quoting someone that I read. And I said in our view, we have to be mindful that, that might actually be the case. So let's not be the person declaring that there's been a tipping point. Look, our traffic in the first quarter, particularly at Journeys, was the worst that we've seen since we've started measuring it. We don't disclose our traffic numbers, but it was worse. And so -- and February was awful and everybody's reported that and then it got better. But if you add up the whole quarter, it wasn't really what we were hoping for. I can't explain it. I can't tell you here is the event that drove it. If I speculate, I would say that the highest period of e-commerce shopping is generally the fourth quarter. So maybe that's habit-forming, but that's just pure speculation on my part. And as I've said, on the last question, we saw the improvement in May. We have a whole quarter of really tough traffic. We have three weeks of an improvement with better weather. We're not willing to all of a sudden say the trend completely reversed based on 3 weeks. And so that is the reason that we're getting more cautious about things. Very hopeful that we're wrong about that, so we're not making that call. And obviously, we're going to try everything we can to try and both drive traffic. We cited the fact that we're accelerating some of the marketing spend that we're making to try and drive our own traffic and then, obviously, we need to really work on conversion at Journeys. The product flow that we're getting should help conversion. And again, what we're seeing in May has been encouraging.

And if I could just add one in terms of...

Yes, sure. I'll just add one thing and then let you ask your question. So we have been seeing traffic declines for some time in our stores and we have been able to overcome those traffic declines with higher conversion. And so our store comps were positive in addition to our e-commerce comps being positive until we had the Journeys fashion rotation last year. That was the time that we saw our store comps become negative. And so it was really in the first quarter that we saw such a large divergence between our store comps and our e-commerce comps and that was the notable call out that we've made.

That's really helpful. And just one other question, a follow-up. When we think about the different divisions, specifically Journeys and Lids. Are you seeing the same type of momentum in terms of the shift to online? And then can you remind us with Journeys, what you're charging the kids for shipping? And how you're seeing the average order value online? Are they trying to cover shipping costs? Are you seeing higher returns? Just anything there will be helpful.

So the reason that we think that there is something more going on is that all of our businesses are seeing a pronounced shift into online and that's even true in the U.K. And so everywhere we look, we're seeing the shift. Now, part of that is we're very pleased in the sense that we have made some important investments to help make that happen. And if you look at the numbers that are being reported for overall e-commerce growth, we're outpacing that. So good for us that we're not in any way disappointed that we're growing our e-commerce business so nicely. It just is hazardous to our health when it comes at the expense of stores because of the deleverage. Hence, we're redoubling our efforts on what we're going to do in terms of correcting at the store level for rents and total square footage. So that's sort of how we're thinking about it.

And as far as shipping or shipping threshold at Journeys, it's $39.99. And the reality is we ship most of our products for free. And all we -- that threshold is in place so that we just don't ship sale products a lot and we see much of our products go out at free shipping levels because we're so full-priced selling-oriented.

Next question comes from Jay Sole with Morgan Stanley.

Bob, I want to ask just a little bit more about the declining part of the assortment in Journeys. Is there any way to kind of maybe dimensionalize it for us in terms of what percent of the assortment it represents? And what options that are hard to offset that part of the assortment with other brands? If we can start there, that will be great.

Well, Jay, I don't think I'm going to get into percentages of what different brands represent in the mix. You just -- we've called out, for many years, one of the benefits we had was a deep and narrow assortment and a number of brands and styles that we're working very, very well that gave us better sell-throughs and higher gross margins. And so -- we're not disappointed that we ended up there. We were giving our customers what they wanted which is the business that we're in. These brands are now coming back to a more normalized level. And given that they were so concentrated, the impact is a little higher. Again, I want to emphasize what I said, these brands are not standing still. And so they are working with our teams trying to figure out ways to accelerate sales, adjust the assortment in other ways. And so we're hopeful that there will be a bottom we find in these brands. I think the point we're -- the place we're pointing at in terms of timing is when we start to lap there a decline which was late June or early July.

Next question comes from Laurent Vasilescu with Macquarie.

I know you don't typically talk about the change of earnings by quarter. I just wanted to get a better sense of the earnings power for this year. Are there any onetime factors we should consider between 3Q and 4Q EPS? And should we assume the historical rate of 50% of full year earnings driven in the fourth quarter?

Yes. Laurent, we don't give guidance by quarter, but let me just give you a sense as to how the year is going to unfold. So as I said, it is going to be really challenging to make a profit in the second quarter of this year. It is our lowest quarter and it is very much, with the flat to negative comp, we will deleverage pretty significantly. When we think about the year in total, we have a lot more opportunity to be able to move the needle in the third and fourth quarters when we have back-to-school and holiday selling opportunities. And so the deleverage that we've been experiencing through the course of the first and second quarters really become much easier. And if you look at the comp guidance that we've given, we have an opportunity in the fourth quarter to move the needle even more significantly. What we have seen is that customers are actually shopping much closer to their need occasion. And so with back-to-school and with holiday, we see an enormous amount of traffic come into our store locations and we have an opportunity to capitalize and take advantage of that to a greater extent than we do in the earlier part of the year.

And the one caution I'll call out on that one is with respect to Lids. They're fourth quarter last year included the Cubs World Series victory and so that's a challenging compare. But other than that, as Mimi said, we think the fourth quarter is a big opportunity for us.

Next question comes from Mitch Kummetz with B. Riley.

I actually have two. I'm a little curious on the guidance. You're most optimistic about comp for Journeys in Q4. It seems to me Q3 is an easier compare and then Q4 also is more of a boot quarter and could be dependent upon weather. So the first question is, kind of why are you kind of guiding that way? And then secondly, just on the real estate, Bob, you mentioned real estate is one of your initiatives. I guess if you -- I've got a couple questions there. What is the margin? How much of -- well, maybe let me ask you this. How much margin -- how much of the growth there is operating margin? So operating margin was down 290 bps. How much of that was the mixed shift to digital? And is there anything you guys can do with the leases that aren't necessarily up for renewal? I mean, are there really anything like kick out clause or anything that you guys can work with the landlords to try to get better rents even if something is not up for renewal?

Yes. Let me start with your last little bit there, the whole thing about what did digital cost us. It's kind of actually hard to do the math, because it isn't clean. We have a distribution center and we have -- we know it's a higher cost to both pick and ship single pieces for e-commerce customers. And we sort of know that at the granular incremental level, but we can't sort of parse it out when you look at our total economics. But we do know that it is indeed dilutive. With leases, the most important thing that we're doing is keeping lease a lot shorter. So when you asked the question, what we do for leases that are not necessarily up for renewal. We've got a lot that are up for renewal and then we do have kick out clauses in a number of our malls. Again, the kick out clauses you get are generally tilted towards the lower half of the universe which is where we want them because as Macy's and JCPenney and others close doors, we're assuming that they will be concentrated in the lesser malls. So we think we're actually pretty well positioned to continue to both negotiate better rents, exit stores where it makes sense to exit stores and to overall kind of battle the deleverage of the rent expense.

One more thing I'd add just before Bob goes on is that even in the interim on the kick out, we have cotenancy clauses and anchor tenant clauses. So as we see some of the closures in malls even if we don't have a kick out, we have some right for some rent reduction and ultimately, are able to exit the location if the situation doesn't improve. So that is really beneficial even beyond us having kick out.

Yes. On Journeys comp, I'll give you some themes, but Mimi could chip in on it. First of all, one of the things we're noticing is that some of the fashion styles that we have assumed are seasonal are 12 months. And so in Q4, we expect to be doing more -- being able to do more in the non-boot category to help drive comps relative to what we've done in the past. And then secondly, in Q4 last year, if you remember how the weather didn't kick in to help boots sales, the merchant team ended up canceling a lot of what we brought into the boot category. And by the time we got to the end of the third quarter, when the weather did in fact turn in like that week before Christmas, we found that we were actually under bought. So we think for a normalized weather pattern in the fourth quarter, we have upside opportunity.

Next question comes from Sam Poser with Susquehanna.

I've got a few questions. One, Bob, can you give us some idea on -- well, for Journeys in the cadence of the comps by month? I know you don't normally do it, but this year is -- it appears extreme. So if you could give us like what February looked like and what March and April looked like together maybe? Anything we can have just to get a feel there?

March -- our February was horrible, March was better and April was pretty good.

We'll move to our next caller, Steve Marotta with CL King and Associates.

Bob, at what point as a percent of the total mix would digital be accretive to operating margin and not dilutive?

It's not -- I don't think that's the right question, to be honest. Because there is two things that need to happen in order for it not to be dilutive. We need to get a little more ahead on the store side of the decline. So it's dilutive more because we've got a minus 4 comp in the stores than it is -- that we're obviously profitable on the incremental digital sale. We just need to try and work the store side very hard. The other part of it is as we scale digital, the investments we make in digital which are ongoing and will probably continue because it is a continuous improvement effort, but those investments will get spread over more dollars. So just over time, it becomes less dilutive in the sense that those investments are get paid for more easily. I can't give you a point at which it happens. It's always going to be continuous. And again, as I've said, that's -- the single most important thing we do to combat this is attack on the store side. Mimi?

Yes. I think that -- Bob, I just to underscore what Bob said, it isn't that digital sales are not profitable for us. They are, in fact, profitable. We run our digital businesses in order to make a profit and are doing that. In addition, we're working hard on the economics of our digital business where we -- if you think about the variable cost of shipping and picking, we're doing a lot to enhance the efficiency of our warehouses to be able to get orders out faster. We have invested in robotics picking systems at Lids. We were upgrading the picking systems within Journeys as well. So with scale and with size, our e-commerce economics will improve even further. It's just a matter of all the deleverage that we saw this quarter was due to that negative comp in the store.

Yes.

Next question comes from Benjamin Bray with Robert W. Baird.

So given the lower traffic, what are you doing to control operating expenses? And how should we think about that in the context of the investments that you're making within the Lids business?

Yes. It's a good question. And it's another good layer to the question previously asked. When we get things -- when we get sales moving from stores to digital, it is toughest on us in the first 2 quarters, because as a small box retail operator, we're pretty much running on a fixed cost basis. You're at -- you're on most days at minimum levels of staffing. And so you don't actually have a lot of degrees of freedom in how you manage that. In the third and fourth quarter, if you can anticipate what you're sales pattern is going to be, you're going to be able to staff a little more readily to that level. So we're really focused more on trying to -- again, as we've said before, focus on the stores and make sure we have the right level of profitability on the stores, that we're getting the right rent deals. We're of a view that keeping leases short almost everywhere at this point becomes more advantageous to us because we think that the traffic trends and then the occupancy trends both give us the opportunity to come back and renew at a better rate. The old model in the old days was always trying to get along a term in order to preserve the rent deals that you negotiated. So it really starts to pay off in the end of the lease term. And I think that has flipped and we're probably better off going short and managing it that way.

I think we're really focused on the fact that it's important to contain expenses in times of transition like this. And the rent line, when you think about our economics outside of our merchandise costs, rent and selling salaries in a small-box fixed economic environment are our 2 biggest costs. So Bob talked about rent, I'll talk a little bit about selling salaries. We've been working really hard to make sure that we maximize all our store labor and have been able to hold store labor flat over the last many quarters with a whole lot of work to make sure that we optimize for when traffic is in our stores. Beyond that, we don't have a big line item that is marketing spend. In fact, we've been spending more on digital advertising and that has proven effective. And so we're focused hard on store expenses and making sure that all of the other investments that we're making have positive returns.

We next move to Sam Poser with Susquehanna.

I just wanted to know, from the down trending styles, could you -- you talked about what you're transitioning out of, could you give us some idea what that is? And two, in February, one of the things that happens is people want to buy boots in February and then when those dollars ship to March, they don't buy boots. So can we assume that February is also impacted by significant -- just the size of those sales relative to what happened subsequently? And secondly, what is -- when you look at Journeys or Lids, I mean, what is the optimum store base? I mean when you think about the whole thing? Or should you have, given what's going on, just a smaller store base? And how do you -- what do you think?

Yes. So we have a thesis that one of the things that made it a little more challenging for Journeys in the first quarter was exactly what you cited that the tax dollars coming out later moved money out of boots and into spring. And so with ASPs, obviously, much lower, we captured less of those dollars. And that's a thesis that I think has some merit, Sam. On the optimal store base, we don't think about it as having -- we ought to be targeting, pick a number, 500 stores. What we do is we really go lease by lease and figure out what we want to do under the assumption that if we close a Journeys store, but the mall stays open, that we don't capture a lot of the lost sales from that Journeys store and we've been analyzing it and it doesn't look like we get any material uptick if we close a store. What happens is when a mall closes and we have a good evidence of this, when a mall closes and all of that traffic disperses to the other nearby malls, that's when we get the pickup. So our approach to this, Sam, is we have no doubt that we're going to end up with a smaller store base. We're going to end up with a smaller store base that is going to be metered by the pace at which malls close or malls get so bad that we can't make a buck in any way and so we close it just because the economics demand it. So we're going to be on a path that is going to be tied to the decline of the mall universe which we think is getting accelerated by all the store closings. So we think at the end of the day, we will be at a much lower number but it's just hard to predict what that number is and what the pace is to get there.

And ladies and gentlemen, that does conclude today's question-and-answer session. I'd like to turn the conference back over to Mr. Bob Dennis for closing remarks.

Thank you for joining us. Thank you for all the questions and we look forward to speaking to many of you in the next several weeks. See you.

Thank you, ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.