00:05 Good day everyone and welcome to the Genesco’s Second quarter Fiscal twenty twenty two conference call. Just a reminder today's call is being recorded. 00:14 I will now turn the call over to Dave Slater, Vice President of FP&A and Investor Relations. Please go ahead, sir.

00:21 Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal twenty twenty two results. Participants on the call expect to make forward looking statements. These statements reflect the participant’s expectations as of today, but actual results could be different. 00:38 Genesco refers you to this morning's earnings release and the company's Sec filings including the most recent ten Q and ten K filings for some of the factors, including the impact of COVID-nineteen that could cause differences from the expectations reflected in the forward looking statements made during the call today. 00:59 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 and the attachments to this morning's press release and in schedules available on the company's homepage under Investor Relations in the quarterly earnings section. I want to remind everyone we have posted a presentation summarizing our results that is accessible on our website. 01:28 With me on the call today is Mimi Vaughn, our Board Chair, President and Chief Executive Officer, who will begin our prepared remarks highlights from the second quarter; and Tom George, our Chief Financial Officer, who will review our Q2 results in more detail and provide direction for Q3. 01:46 Now, I'd like to turn it over to Mimi.

01:49 Thanks, Dave. Good morning, everyone, and thank you for joining us today. Following an incredibly strong start to fiscal twenty two, we delivered an outstanding second quarter performance as our top line accelerated even further ahead of pre pandemic levels and we produced record Q2 EPS that well exceeded our expectations. With much stronger revenue highlighted by robust full price selling and good expense management, our second quarter profit for our footwear businesses also set a new record. 02:23 The levels at which our business performed during the first half of the year following a challenging fiscal twenty one reflects the strong competitive positions of our retail and branded concepts, close connections with our customers and the compelling execution of our footwear focused strategy to transform our business and deliver these results. 02:44 We are a stronger company coming out of the pandemic. Our results highlight the work we've done to accelerate online sales and enhance our store and omnichannel offerings as we create and curate leading footwear brands to be the destination for our consumers favorite fashion footwear. 03:04 Our teams continue to do a superb job providing the right product our customers are looking for combined with exceptional service and differentiated shopping experiences. Our outperformance was driven by better than anticipated results across the board with all businesses exceeding pre pandemic profit levels. 03:26 As excited as we are with the progress we are making, we are even more excited about our strategy and our future opportunity to build upon this foundation and drive growth, profit, and shareholder value. 03:41 I'll begin by providing some highlights from the quarter. Both revenue and adjusted operating income exceeded pre pandemic levels, increasing fourteen percent and three forty six percent respectively over fiscal year twenty, two years ago and higher…

18:46 Thanks, Mimi. As Mimi mentioned, total Q2 results far exceeded our expectations and last year across the board. For comparison purposes, we believe that comparing to two years ago, our fiscal twenty provides the most meaningful assessment of current performance and the return of our business to pre-pandemic levels. However, when comparing to fiscal twenty, I would like to remind everyone how our strategy has changed our business. E-commerce has become a larger percentage of sales and our licensed brand segment has become a larger piece of the total as well due to the acquisition of Togast and strong Levi's sales. 19:33 These changes come with an overall lower gross margin rate due to the impact of direct shipping expense and expansion of our wholesale volume, which should be more than offset with lower SG&A from these businesses. While these changes will reshape the P and L, they have a positive impact on operating margins and an added benefit of a less capital intensive business model. 20:00 Turning back to Q2 results, I'm pleased to report that not only did the second quarter continue, but it accelerated the sequential improvement of our operating results since the onset of the pandemic. Higher revenue and gross margin combined with SG&A that remains well managed, led to significantly higher operating income versus fiscal twenty and Q2 adjusted earnings per share of one point zero five dollars compared to zero point one five dollars in fiscal twenty. 20:35 In terms of the specifics for the quarter, consolidated revenue was five fifty five million, up fourteen percent compared to fiscal twenty, driven by continued strength in e-commerce, which is up ninety seven percent versus fiscal twenty, taking overall digital sales to nineteen percent of our retail business compared to ten percent in fiscal twenty…

32:34 Thank you. [Operator Instructions] Thank you. Our first question is from the line of Mitch Kummetz with Pivotal Research. Please proceed with your question.

33:11 Congrats on the quarter and thanks for taking my questions. Let me start with the guidance or the outlook for Q3. So, I think you said sales up mid-to-high single-digits on a two year basis. Can you say kind of where August came in relative to that? Is August better than that? You're expecting some moderation or can you maybe just provide a little color on that?

33:37 Sure. Let me – hi, Mitch, it’s Mimi. Let me start and then turn it over to Tom. I think that it's important to put August in the dimension of what happened last year with back to school and also this year. So things were a lot different a year ago. We estimated that two thirds of students attended school only virtually to start the year. 34:00 This year, we estimated that there was a real push to get kids back into school and we're estimating that essentially all students went back in person. And so, we had a great second quarter and coming into the quarter we thought that back to school also would be positive and we have continued to see, we've been pleased with the results so far, we've got the right assortment. We've been pleased with what we have seen. 34:28 One important note is that the Labor Day this year compared to fiscal year twenty and that's what we keep comparing to is, one week later. So, we're going to know basically this weekend, what the comparison period is. So, we're tracking to and above fiscal year twenty levels overall, and we'll know more when we complete the Labor Day weekend. We also think that there is a likelihood of back to school having a longer tail in September and October, like it did last year. 35:06 We didn't see a lot of sales in July and August last year, but people waited to see exactly what might happen in schools and there was more purchasing later on. And Tom I don’t know if you had anything to add to that?

35:19 No, I think that's a good summary. We feel really good how we're tracking so far and keep in mind; we have more of a wholesale business this year as well relative to two years ago. So, that tracks really at a different pace than the retail business and we do expect some good growth out of our direct channel as well this year relative to two years ago. So, feel really good where we're tracking so far.

35:46 Yeah. And I'd also remind you mentioned that August is a really important month that's over forty percent of the third quarter because of how heavy back to school is. So, it's good to have that month behind us.

35:58 Okay. And then Tom on gross margin, you mentioned that you expect gross margin to be below twenty twenty levels for the quarter you just reported. I think you're up around fifty bps ahead of two years ago. So, is the difference all on freight or are there other factors that are putting a little bit more pressure on Q3 versus Q2 on a two year basis?

36:23 The big difference there is freight. There's a significant amount of freight in the second quarter. I mean, we’re planning on approximately rounded numbers around seven million dollars of additional freight in the third quarter and that has a big impact on the gross margin percentage and a big impact on our operating income results relative to two years ago.

36:47 And just to be clear, is that seven million dollars more than two years ago or seven million more than what you saw in Q2, just help me understand with that?

36:55 Relative to two years ago and it's a combination of additional vessel charges; it's a combination of airfreight things like that to get the product into our consumer’s hands. So, it's a big difference relative to two years ago. It's just a part of the results as some of the supply chain challenges out there, but we think we've got our hands around it to manage it and we think we've got our exposure included in the back half projection. And we also have some in the fourth quarter as well that have got in our projections just to be cautious.

37:30 Okay. Do you know off offhand what the other freight was in Q2 versus years ago? It was more minimal when we really started to see the backup of the supply chain. And particularly in our branded business, we are having to airfreight product and that's pretty meaningful. I think you’ve seen the container cost go up pretty significantly. So, it's really much more pressure in the third quarter than it was in the second quarter.

38:02 And Mitch in the second quarter it was almost two million dollars.

38:05 Okay. And then lastly, just on the supply chain, how much longer you think these disruptions will occur? I mean, does this linger in through like the first half of next year? And can you speak to kind of your ability to get product maybe versus some of your competition? I know that for a lot of your brands, you're the largest or one of the larger customers and I'm just wondering, kind of how much of a competitive that advantage that is in the environment of a challenging supply chain?

38:38 Yes. So, we think it's a huge competitive advantage in this environment because is not a new problem. We've been managing through supply chain challenges really since the onset of the pandemic and we've been chasing inventory all the way through, basically last quarter what came in went right back out and yet sales were strong and sales has just continued to be strong. 39:05 So, in our retail business, we're seeing good products flow right now, but it's lower than we would like We have worked on mitigating the risk by ordering higher sales in our projection. So that would help us. And we – so that we can get caught up with some suppliers and we also ordered early and strong, certainly on some core retail style styles. We're an important partner to our brands. They've worked with us as much as possible. Journeys always get more than fair share of products. 39:38 So, we've got the window to re-inventory before holiday and think that it will certainly be challenge to holiday and from what we can see right now, even into the spring possibly, but there's a lot of time between here and there. Factories have been latest situation and there is time to address some of the situation there and then everybody is focused on clearing up some of the problems in the supply chain, but certainly through holiday and perhaps in the spring as well.

40:08 Great. Thank you.

40:11 I think maybe I’d add because we are such a strong strategic partner to our key suppliers, we took advantage of that and ordered early and higher on some key styles for fall.

40:25 Perfect. All right. Thanks. Good luck.

40:28 Thank you.

40:28 The next question is from the line of Steve Marotta with CL King. Please proceed with your questions.

40:37 Good morning, Mimi and Tom, let me offer my congrats to on the second quarter. Can you please remind us the twenty five million dollars to thirty million dollars of cost savings? Can you talk about how that will be realized and what the cadence is there? And if there possible that there's anything behind that you've alluded to in prepared remarks, continued ways of making the business less capital intensive? Thanks.

41:03 Yes, Steve. So, we're good progress. We've identified twenty that's on an annualized basis and we believe in the back half, we can realize half of that in the form of those items are outlined on the call. Occupancy expenses better selling salary productivity. We have fewer stores. We're going to have savings and depreciation. We've got some procurement initiatives. 41:27 So, roughly half of that twenty million dollars will be realized over the back half. And on the capital light model, I mean, we've got a good wholesale business now. And you can manage your inventories well, our situation we have with the Togast acquisition which is a very capital light model. 41:48 Fewer capital expenditures evolved obviously with the wholesale business because you're not opening up stores. Another driver of the capital light model is our digital business. It's a very variable cost model and we've made investments historically and we're leveraging off those investments going forward. 42:06 So, we feel really good how capital efficient the models come and we'll continue to look at cost savings as well as working on the capital base to continue to drive good returns on invested capital.

42:21 That's helpful. And we're seeing across the space when cost savings like this are being implemented, a lot of that is being reinvested in digital marketing and demand creation investments. Is that your intent here as well? Or is it literally a net number coming right out of the P&L?

42:41 So, Steve, certainly, we are investing a lot in digital marketing and in demand creation and we have to do that for both our websites and to our stores. I think the key here is that our e-commerce channel is profitable. And the investments that we're making in digital marketing are actually generating a return. And so we think about that in terms of those channel economics. 43:10 When we think about the brick and mortar side, the challenges there really are to reduce occupancy expense and that's why we've been so focused on that. And if you think about, if we can align occupancy to the appropriate level of traffic right now, and we are spending a little bit more on advertising. So part of the way we're thinking about being able to fund that advertising is through the rent reduction. So, the way we're thinking about this is channel on a channel specific basis.

43:46 Very helpful. Thank you.

43:51 Our next question is from the line of Jonathan Komp with Baird. Please proceed with your question.

43:57 Yeah. Good morning. Thank you and hope everyone is staying safe. I want to just first to follow-up on the supply chain topic. I know, you don't have guidance into next year, but just given the situation with the factories are there scenarios you're hearing from your brands where there might be a shortage of product to sell even more than – more so than what you've faced so far? Just wanted to get your current assessment of the situation with the factory closures and the impact it might have?

44:29 Sure. Thanks for that question, John. I think that when you think about both Journeys and Schuh business, which represent probably eighty percent of our business. The key is that we are diversified across a number of suppliers. And I think that that gives us a real advantage and we've talked a little bit about how important we are to our suppliers, the great partnerships that we have had and the prioritization that we get as a result of how important we are to them. And so the key for us is just the diversification that all suppliers are working hard that they're in a number of different factories and in this case, having multiple brands is a benefit for us.

45:16 Okay, great. Thank you. Maybe a bigger picture topic than on really the sustainability of the margin performance and coming off of a first half where you’re typically not very profitable and you were quite profitable this year. How should we think about really the ongoing ability to drive higher margin with everything you've talked about and the increased focus on footwear portfolio, but how are you thinking about what's sort of sustainable versus other benefits that maybe we should expect to continue and how that relates to your broader margin opportunity?

45:59 Sure. So, John, it's a great question. And I think we're so pleased with the results that we had in the first half, there's no question that there were unique factors in terms of the consumer being in a really great place to spend because of stimulus and other government help, there was pent up demand as well. But I think if you look at what specifically we are doing to drive the business. The first thing is around digital and we've talked about how digital is such a profitable part of our overall business. 46:31 We were able to double the size of the e-com business to the course of the pandemic, which means significantly more profit contribution and that'll be in every quarter of the year. We've also talked about rent expense and how important an initiative that is to improve the profitability on the brick and mortar side. And Tom said today, our improvements are just a little under thirty percent and that's compounding on a twenty plus percent last year compounding on eight percent to ten percent in prior years. 47:04 So through a compounding effect, that helps as well. And so we feel like there is a real path to be able with those couple of things plus the growth of the branded side of our business those license brands and this opportunity to re-imagine Johnston & Murphy. We saw the same thing coming out of the great recession. We had a chance to really take the brand up to the next level. And we think there is tremendous opportunity to do that through re-invention of the product, re-invention of the marketing, which is underway right now. 47:40 And so we saw a doubling of Johnston & Murphy’s brand really coming out of the great recession. We think there's an opportunity again to take Johnston & Murphy to the level. So, I think the combination of those three things give us great earnings potential going forward irrespective of the things that were unique to the first half of the year.

48:03 And I think I’d add again with being a key asset to all the major relevant brands in the retail side of our business. We have the ability because another strength we have is our ability to merchandise product and service product and convert sales, we got the ability, I think everything else being equal to drive some really good gross margins going forward to continue to do that. And with Johnston & Murphy and our license brands business, we have the ability to drive good gross margins and some improvement in those going forward. 48:36 And then just a reminder in the wholesale business on the operating income level, we've got visibility in line of sight that the wholesale business as well is going to be double-digit operating margin going forward.

48:50 Okay, great. Just last one for me. The incentive compensation piece, can you just, sorry if I missed this, but can you give us an update where you're tracking this year given the increase in the corporate expenses that we can see and then how should we think about kind of a normalized level after this year? Thank you.

49:12 So, thanks for that question. So, I think an important point to make is that we paid no incentive compensation last year. The way that our program works is that since the pandemic caused substantial disruption, to our operating results even though our team navigated the pandemic so well, constraining expenses and capital and improving liquidity that's because we didn't have year over year improvement, no performance compensation was paid. 49:44 This year, there is a substantial improvement in earnings on a lower capital base and our plan is designed to be highly aligned with shareholder interest as the bonus is generated for the incremental improvement. And so part of what you are seeing in the corporate expense is the booking of bonus, higher level of bonus this year versus two years ago. And we will see a little bit of that in the back half as well, but given the strong performance, that's how the bonus centers up being booked in the second quarter.

50:20 Any willingness to quantify just so we can understand the moving pieces in the SG&A?

50:28 No, we normally don't get into that level at detail, John. I think another point to be made though is, reinforce just a huge year over year improvement we had in economic value added because we did have big year over year improvement earnings on a much lower capital base that this year would be – the bonus related incentive compensation would be higher than we'd normally expect in future years.

50:58 Thank you. At this time we’ve reached the end of the question and answer session. I'll now turn the call over to Mimi Vaughn for closing remarks.

51:05 Great. Thank you for joining us today. We look forward to talking to you again at the end of our third quarter.

51:13 Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.