Good day, everyone, and welcome to the Genesco Third Quarter Fiscal 2023 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.

Good morning, everyone, and thank you for joining us to discuss our third quarter fiscal 2023 results. Participants on the call expect to make forward-looking statements reflecting their 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 its most recent 10-K and 10-Q filings, for 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 measure during the call. All non-GAAP financial measures are reconciled to the GAAP counterparts in the attachment to this morning's press release and in schedules available on the Company's website in the Quarterly Results section. We have also posted a presentation summarizing our results. With me on the call today is Mimi Vaughn, Board Chair, President and Chief Executive Officer, who will begin our prepared remarks with an overview of the period and the progress we are making to drive the business. And Tom George, Chief Financial Officer, who will review the quarterly financials in more detail and provide guidance for fiscal '23. Now, I'd like to turn the call over to Mimi.

Thanks, Darryl. Good morning, everyone, and thank you for joining us today. We are pleased with our overall results, particularly sales and gross margin performance. Against last year's record third quarter, we grew revenue 4% on a constant currency basis, achieving significant improvement over the first half of the year, and comps were up 3% with every business posting positive gains. At the same time, gross margins were better than we expected as we lapped last year's unusually strong gain. The progress made with our footwear-focused strategy to increase digital penetration, strengthen consumer connections, grow our footwear brands and reshape our retail cost structure has put the Company in a better position to both outperform and favorable economic backdrop like we experienced last year and effectively navigate the more difficult consumer and market conditions we're facing today. The third quarter played out largely as we had anticipated with many consumers coming out to shop when there was a reason to buy and retreating to conserve cash during the in-between periods. This was a real change from the strong selling environment a year ago when the back-to-school selling season extended into late September and October, driven by higher consumer savings levels and pent-up demand and students bought anything that was in stock and available. Like they have since the beginning of the pandemic, our teams were prepared for whatever came their way and did an excellent job capturing demand when the consumer emerged and shopped. At the same time, the diversity of our multi-division business and consumer segments proved beneficial. Robust spending by Schuh's customers in the U.K. and J&M's more affluent customers in the U.S. drove healthy top line gains. We entered the pandemic in a position of strength, navigated the heart of the pandemic well and emerged stronger. That…

Thanks, Mimi. As Mimi said, we were pleased with our results for the quarter. We have solid capabilities, to not only navigate the current challenging environment, but also we are confident in the ability of our footwear-focused strategy to drive strong results over time. Consolidated revenue in Q3 was $604 million, up 1% to last year. On a constant currency basis, sales were up 4%, and we had gains in all divisions. Schuh's dollar sales were below last year due to significant foreign exchange pressure from the strengthening dollar. On a comp basis, Journeys' total comps were up 1%, Schuh total comps increased 3% driven by stores and J&M continued its strength versus last year in both stores and digital, with total comps up 20%. Overall, total company comps were up 3% for the quarter, with store comps up 2% and direct comps up 6%. We ended the quarter with 30 fewer stores versus a year ago, as we optimize our store footprint and drive productivity in our existing store estate. Digital sales were up almost 75% versus pre-pandemic levels. E-commerce sales accounted for 18% of total retail, which was flat to last year and up from 11% in fiscal year '20. Wholesale was up for both J&M and Licensed Brands, as J&M continues to have success with new product offerings in key accounts. Gross margins were down 50 basis points to last year, but were ahead of our expectations driven by better results for Journeys and J&M. The main driver of the year-over-year change was the return to a more normal promotional environment compared to essentially none last year and increased freight expense. By business, Journeys' gross margin was down 40 basis points. Schuh's gross margin was down 80 basis points, pressured also by greater-than-expected additions to its loyalty…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of Steve Marotta with CL King. Please proceed with your question.

I wanted to ask you a little bit about consumer buying patterns in the fourth quarter. You mentioned that this year was a typical back-to-school. And being the armchair contrarian that I am, if the fourth quarter is a normal historical holiday shopping pattern and obviously, November then would be difficult based on the compare and with evidence that Black Friday and Cyber Week was a little bit better, is it possible that December could be a little bit better than what people are expecting as well?

Steve, thanks for your question. And just to talk a bit about the consumer patterns that we've seen and give you some of our thoughts on how we thought about the remaining months in the quarter. Listen, back-to-school was more typical. What we have been seeing is that when there's a reason for the consumer to shop, particularly the Journeys consumer, they turn out and they do shop, and they're conserving cash in between. There's no question that we believe that the consumer is waiting this year to shop much closer to the holidays, Christmas and Hanukkah are in the same time frame this year. And I will remind you, as you appropriately called out that we were running on fumes after selling out in November, and we had limited receipts in December and January. And so, we will see. I think that we were pleased with the overall performance of -- over Black Friday. We know that we've got a great in-stock inventory position that when the consumer comes out to shop, that we will be able to provide them with the merchandise they're interested in or our sales teams are ready to go and can really make the sales happen when the consumer arrives as we did over Black Friday weekend. But given the choppiness that we have seen, we thought it was just appropriate to be conservative for December and January. One other thing I would call out for January is that last year, we actually didn't have any product to be able to provide for returns and exchanges. And this year, we will be in a position to do that. Christmas is on Sunday this year, and there should be a good week of selling afterwards. And so we're ready. We've got the inventory. We've got the people, and we will see where we go.

That's very helpful. When we think a little bit about next year, and I know you're not providing guidance understandably, so -- but can you talk a little bit about how you're thinking about next year and planning for next year? There's, obviously, a lot of chatter within the industry that, from a wholesale standpoint, wholesale orders are down pretty significantly year-over-year for the first half, and then we'll see what happens for second half. Are you planning similarly? Do you think it's going to be a tail that you have? And then I have one follow-up as well.

Sure. So, the way we're thinking about it is, right now, there is a large amount of inventory in the system, and we are seeing a lot of promotional activity. And therefore, everyone is pulling back on receipts and trying to work through the inventory that's in the system. And so, we do think that, that will continue somewhat in the patterns -- into the patterns of next year. But overall, as we are thinking about our ability to grow sales, both online and in stores, which is a very large part of our business, growth will be really important for us. We have an opportunity to convert consumers who are aware of Journeys that aren't buyers. With digital at almost 20% of our business, we plan to drive digital with its healthy double-digit profitability returning to historical levels of growth will really drive our business. We're in early innings for loyalty. We talked a little bit about the success we're having with Schuh and with the J&M loyalty program, and so we're introducing loyalty for Journeys next year. We will have a little bit of growth in our store base. And right now, our Johnston & Murphy business is really doing well with continued growth in casual apparel and our footwear categories. So, we're really planning to drive growth next year, and that will be a key overall. We do a lot of business in back-to-school and holiday. And so that will be a time when some of the cost pressures from additional freight expense and some of the pressures that we've been seeing ought to abate. And so, it's going to be a real focus in the front part of the year, and then real opportunity during back-to-school and Christmas.

That's very helpful as well. And Tom alluded to potential realignment from an expense standpoint. Can you talk a little bit about -- I know you probably don't want to get into magnitude at the moment, but the impact -- when could it have the impact? Could it be rather immediate? Is this going to be multiyear? Is it something that could move the needle next year? Maybe just talk a little bit about it again without providing any sort of detail that you're not -- that you can't do right now?

We have a really good track record of reducing costs. I'll hand it to Tom in a minute. Most recently, during the pandemic, we cut costs dramatically and quickly when we had to do that. Rent is our big expense. We've had a multiyear effort with a lot of success year after year of reducing our overall rent expense, and selling salaries really have been a journey. We've done a lot to use analytics and data to be able to put -- to create efficiency really, and put the right ratio of our store people to customers and drive efficiency that way. And so, we think there will be opportunity there that we'll get into. And so, I think we've got a great track record, and we will, certainly, get after the cost pressure that we've been seeing.

Yes, Steve, let me reinforce that. We do have a good record of reducing cost in the Company. We've got good discipline around that. We've been looking at this closely with this tsunami, so to speak, of inflation that hit us and -- especially around talent retention, being able to attract and retain talent. We've got increased cost in our DCs on an hourly basis, increased costs in our selling salaries in the store, increased IT costs to be able to execute on the digital initiatives. But we feel good we're going to be able to identify some cost and be able to take some cost out of the business going forward. And let us get through holiday here and spend some more time with it when we report our fourth quarter earnings, we'll be able to give everybody some more detail around the order of magnitude and the cadence.

Our next question is from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.

I've got three as well. I'll just do them one by one. So, first question is really a follow-up to Steve's first question. It sounds like November was tough, although you're not giving us a number. So I guess my question is. Does the Q4 implied kind of Q4 sales outlook assume sequential improvement over the balance of the quarter as you lap easier comparisons? Or are you basically kind of taking where you are for November and extrapolating that over the balance of the quarter?

Yes. So, I will let Tom talk a little bit about that. But Mitch, we clearly see, again, that when there is a reason to shop that that Journeys consumer comes out. And so again, we are optimistic. We saw that happen during back-to-school. We had tremendous results in August when there was a reason to shop. We had very good solid results when there was a reason to shop over Black Friday weekend. And so, we are looking -- again, we believe that Christmas and the holidays will be more back-end loaded. What we have done is we've taken the trend in the back part of November, with the pickup in the back part of November, and we've actually been more conservative than what that trend was running just given some of the choppiness. I did highlight with Steve's question that we think there's opportunity for Christmas week. There's an extra day of selling. We do think there's opportunity after into January as well, with a good and soft inventory position, we ought to be able to drive sales.

Yes. I think, Mitch, I'll just add to that. We did see the back half of November, including Black Friday. We saw some better -- some improvement in our business, but with a good -- roughly 2/3 of the business to go in the quarter, we think it's still -- we should be more cautious with that much business to go. So, we've been more cautious on the trend going forward. Mimi points out some of the differences relative to last year relative to pre-pandemic, and we feel that there's opportunity there potentially to outperform that. But it's early -- there's a lot of business to deliver here. So, we think it's best to take a more cautious view on the balance of the quarter at this point in time.

Okay. That's helpful. And then a question on the wage inflation, the pressure there, I'm just wondering if you see any potential light at the end of the tunnel there? I mean I don't know that minimum wage rates are going to go down, but maybe if we end up in a slightly less competitive labor market, could that potentially help that situation? And then I have one last question.

On wages, we have been really -- I think that the biggest pressure of late has been just competitive pressure. I think we all came out of the pandemic, and we're looking to hire people because our businesses -- to drive our business. And we have seen some good abatement in that overall pressure to bring talent on board in the last few months. And just given where the economy is right now, we think there should be less competitive pressure going forward. But I'll turn that to Tom to add anything else.

I think what I'd add is we see opportunities for further automation, both in the stores and in our distribution centers as well. So that can -- obviously, that's going to require some capital. But at the same time, we see that's going to be able to improve some of our operating expense lines going forward. I mean it's going to take a while to implement that. And I'll give you some more details around that when we do the fourth quarter. But I think there's some light at the end of the tunnel there.

Okay. And then last question, just on the gross margin. So hopefully, my math is correct, and Tom, correct me if it isn't. But for Q4, I back into a gross margin rate of like 46.5% to 46.9%, which is down a couple of hundred bps year-over-year, but it's actually pretty flattish on a three-year basis. And I'm wondering, just given how difficult the environment is, I totally get that you would expect more promotions year-over-year. Are you basically thinking that promotional levels are going to be similar to kind of pre-COVID? Or is there a reason to think it would be worse than that? And if so, why wouldn't the kind of the implied Q4 gross margin not be worse?

Yes. I think the way you're looking at the gross margin for the implied gross margin for Q4 is consistent with what we're thinking about. And we are assuming that the fourth quarter this year will be -- from a promotional perspective, will be similar to the fourth quarter of our fiscal year-end '20.

All right. Thanks, everybody, for joining. I think there are no more questions in the queue, and we look forward to talking with you on our next call.

Thank you.

This will conclude today's call. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.