Genesco Inc Q4 FY2025 Earnings Call

Good day everyone and welcome to Genesco’s Third Quarter Fiscal 2025 Conference Call. Just a reminder, today's call is being recorded. Genesco management included in the conference call will be Mimi Vaughn, Board Chair, President, and Chief Executive Officer; Sandra Harris, Senior Vice President, Chief Financial Officer; Tom George, Senior Vice President, Principal Accounting Officer, and Darryl MacQuarrie, Senior Director FP&A. I will now turn the call over to Darryl MacQuarrie, Senior Director of FP&A. Please go ahead.

Good morning, everyone and thank you for joining us to discuss our third quarter fiscal ‘25 results. Participants on the call expect to make forward-looking statements reflecting our 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 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 schedules available on the company's website in the quarterly results section. We have also posted presentations summarizing our results here as well. With me on the call today is Mimi Vaughn, Board Chair, President, and Chief Executive Officer; Tom George, Principal Accounting Officer, and Sandra Harris, Senior Vice President, Finance, and Chief Financial Officer. Now, I'd like to turn the call over to Mimi.

Thank you, Darryl. Good morning, everyone. Thank you for joining us. I'd like to begin by welcoming Sandra, who joined Genesco as Chief Financial Officer in October with over 30 years of finance leadership experience, including 10 years at VF Corp, where she was responsible for driving global business and financial strategies across VF's iconic lifestyle brands. Her experience with VF includes serving as Chief Financial Officer for direct-to-consumer, global supply chain, and shared services, including information technology. She's a terrific addition to our team as we drive a return to profitable growth, bringing invaluable expertise from numerous multi-channel, multi-brand consumer businesses. I also want to take a moment to thank Tom for his many contributions to Genesco, since stepping in as CFO in late 2020. Tom joined our company at a pivotal time of tremendous change in the consumer environment, helping us successfully navigate both record highs and some very unique challenges. After a 40-year career in finance, including 30 years as a public company CFO, we wish you all the best during your well-deserved retirement. I'll start with a review of the key drivers of our third quarter performance and provide an update on the strategic initiatives to drive growth at Journeys and elsewhere across our company. Tom and Sandra will review our financials in more detail and walk through our raised outlook. Then we'll be happy to answer questions. But first, we were pleased to deliver third-quarter results that exceeded expectations, marking another quarter of year-over-year sales increases and a strong return to positive costs. Our outperformance was driven by Journeys as the initial phase of our strategic growth plan unfolds, underscoring the outstanding execution of Journeys' near-term initiatives and the resilience of this business even in the face of continued consumer headwinds. Journeys comparable sales for the third quarter not only inflected positive, but were up double digits fueled by continued improvement in the product assortment and the visual reset of our stores, among other actions. Congratulations to Andy Gray and the entire Journeys team for the speed in which they've been able to enhance the consumer experience and deliver an excellent back-to-school and strong finish to the third quarter. This performance more than offset modest comparable declines for both Schuh and Johnston & Murphy, allowing us to deliver total comparable growth of 6%. Both store and digital comps were nicely positive with the digital business a standout up mid-teens with digital penetration reaching over 24% of retail sales. Overall, sales, gross margins, and expenses as a percentage of sales all exceeded our expectations in Q3, and our clean inventory exiting the quarter positions us well for the balance of the year. Ongoing cost reduction and store optimization efforts contributed to adjusted EPS as well, which was also meaningfully above our projection and up versus last year. If you add back the approximately $0.35 to $0.40 from the 53rd week calendar shift, including the move of an important back-to-school week into the second quarter instead of the third quarter this year, EPS would have been up further, highlighting the impact of positive comps driving profitable growth on the platform of reduced costs and lower share count we've been building. Our number one priority is to improve performance at Journeys. As we have in the past, most recently coming out of COVID with Schuh and J&M, we have demonstrated our ability to evolve our businesses to meet shifts in consumer preferences and changes in purchasing behavior, emerging stronger through challenging cycles. The consumer dynamic and changes over the last few years have required accelerated and unprecedented ongoing evolution on our part to successfully meet our customers’ needs. We are excited to accomplish this with Journeys. As a reminder, step one of our plan centered around efforts to inject the product assortment with more newness and storytelling, and to deliver that to our consumers through enhanced store, digital, and social experiences. The double-digit comps in Q3 demonstrates solid progress against that plan. The Journeys consumer has become more interested in a broader range of brands and more diversified in the styles they're wearing. For the first time in several quarters, we saw a notable pickup in interest in footwear over back-to-school, marked by growth in industry traffic this year. This shift plays well into Journeys' proposition as the expert curator of styles across both casual and fashion athletic brands. Importantly, we're seeing strong consumer response across both categories, reinforcing Journeys' unique position as the footwear destination for the style-led teen, particularly the teen girl. Journeys traffic consequently considerably outpaced the growth in traffic in the industry. While sales at Journeys have accelerated after multi-year positive sales runs, traffic at Schuh and Johnston & Murphy continues to trend lower than last year. Schuh’s performance is being hampered by the difficult macroeconomic environment in the U.K., while in the U.S., softer demand for premium non-athletic footwear is pressuring J&M's top line. On both sides of the Atlantic, consumer behavior remains needs-based and consumers remain very selective about what to buy. We continue to add newness and freshness into our assortments to satisfy shoppers who are looking for key footwear items and must-have products and passing on everything else. As we entered the fourth quarter, we have been pleased with our performance to date and in our Black Friday Cyber Monday results in the midst of a heavily promotional retail environment. The arrival of more seasonable weather has encouraged sales of fall and winter merchandise. While we diligently work to deliver a strong holiday and finish to the year building on these positive Q3 results, we're in the very early innings of returning Journeys and the overall company to historical rates of sales and profitability. We're optimistic that these product changes and a sharper focus on the consumer along with initiatives around brand building and elevating the consumer experience will drive even greater improvement in Fiscal ‘26 and beyond. And now for more color on our individual businesses in Q3, starting with Journeys. After turning positive in July, comps accelerated as back-to-school shopping got underway in earnest and remained consistently strong throughout the quarter. Journeys' skilled merchant team and new merchant leadership took aggressive and quick action with the order book and our key brand partners at the start of the year to bring in the styles that would resonate during back-to-school. Significant newness across a number of casual and athletic brands fueled strong full price selling, including post-Labor Day, even as the industry saw a pullback in demand when there wasn't as much reason to shop. Journeys customers transitioned nicely into buying must-have styles in the fall-winter assortment at the end of September into October during what is typically a non-peak time before the holiday, driving sales gains for the quarter, which outpaced the market. With greater depth of the brands and styles teens want, we are well positioned to continue to drive demand through the holiday season. Journey's stores with positive traffic and higher average selling prices inflected positive, and Journeys' digital business remained very healthy posting another quarter of double-digit growth and even sharper acceleration than stores, resulting in digital representing 17% of total sales. This performance is reflective of our recent cycle of investment in digital, including all access loyalty program incentives, CRM campaigns, and omnichannel delivery options targeted to entice shoppers to purchase online. Moving to Schuh, comps improved versus the first-half getting closer to positive territory even as the footwear category continues to face market headwinds in the U.K., while Schuh challenged the sequential improvement was driven by better performance in stores as traffic and conversion picked up relative to earlier in the year. At the same time, digital sales remained resilient and were positive at over 40% of the business. The Schuh kids category remained a bright spot and delivered a solid back-to-school, continuing its trend of outperformance as well. During Q3, U.K. consumers were motivated to buy only during key shopping periods and the market overall was more promotionally driven to spur demand. We expect this choppiness to continue in the fourth quarter. Despite the challenging backdrop, according to Kantar, Schuh held its number 10 position in the U.K. footwear market versus last year, remaining a key destination for the youth shopper. Looking ahead, the team has focused on a number of initiatives to improve performance. Like Journeys, Schuh is leaning into the opportunity to better serve the female customer and further differentiate Schuh to both consumers and global brand partners. With that positioning, Schuh has achieved success, elevating its access to several key athletic and casual brands and important franchises for future coming seasons and is working on others. Schuh is also building awareness and engagement with its new brand agency and marketing campaigns. This work also includes leveraging in connection with its CRM programs, the growing Schuh Club loyalty program, which now stands at almost 3 million members and benefits from greater member purchase frequency. Now turning to our branded business, starting with Johnston & Murphy. Like Schuh, J&M's comps improved over the first-half as consumers responded favorably to new product launches and new product innovation and we anniversaried last year's ERP implementation. While store traffic was down in Q3, both conversion and transaction size were up demonstrating positive customer reaction to the assortment. Despite an ongoing slowdown in men's non-athletic premium footwear, J&M continues to make inroads driving growth in more casual footwear and non-footwear categories like apparel and accessories, which now represent about half of direct-to-consumer sales. Our strategy of evolving J&M into a more casual multi-category lifestyle brand in response to the changing needs of the J&M consumer has produced significant sales growth over the past four years as the team works to reimagine and reposition the brand from its legacy dress shoe heritage. Looking ahead to the balance of the year, we expect and have seen an acceleration in sales of the fall/winter assortment with items like outerwear as the weather has finally turned colder across the country. In addition, we're in a better inventory position in our stores for the holidays, including more depth in footwear, outerwear, and other items, and with success relaunching backpacks and other accessories. And looking further ahead, we have several initiatives underway to improve current trends and return J&M to year-over-year growth. The most important of which are efforts to bring more distinctive product to the market built upon our unique brand style, quality, and design principles, and to deliver more frequent year-round freshness in our offering. This includes bringing back updated iconic styles for our 175th year brand anniversary next year. Coupled with efforts to increase brand awareness, we look forward to driving this renowned brand to new heights. Wrapping up the branded discussion, we continue to achieve very good success with the repositioning of Genesco Brands Group. Efforts to simplify the licenses portfolio to emphasize key brands and channels means lower sales in the short-term, but considerably more profit, which was evident once again in Q3 results. Now moving back to Journeys and its strategic growth plan, our broader plan centers on Journeys' unique positioning to address the underserved teen girl in the mall. While this customer is well served with fashion apparel, our in-depth market research revealed Journeys as an even greater opportunity to serve this consumer's fashion footwear needs. To that end, we've been expanding our consumer segmentation and sharpening our brand positioning to reach a wider teen audience with a more intentional focus on the style-led teen with a sharp point on her with an assortment of even more premium products. This consumer continues to evolve and today's teens are interested in expressing themselves in different ways from one day to the next and footwear is a key enabler to this. At the same time, the marketplace is quite segmented among athletic, casual, and fashion with no concept that goes across all footwear categories in the mall for the style-led teen. This is the opportunity and no one is better positioned than Journeys to win with this customer. We have built three strategic growth priorities around product, brand, and experience to fuel our new positioning and engage and excite more customers. In addition to bringing in a new president, we have also augmented our talented Journeys leadership team this year with highly experienced new Chief Product and Marketing Officers who bring tremendous expertise. Starting with product and diversifying our footwear leadership, our focus here is on expanding our leadership positions across athletic, canvas, and casual footwear with both breadth and depth of key leading styles, building more long-term strategic partnerships with our best-in-class premium footwear brands, and editing and focusing our non-footwear business. Next is investing in our Journeys brand. These efforts include creating a new brand purpose and platform to differentiate and be a positive, inclusive, connected force for teens and young adults, increasing investment in brand marketing, delivering Journeys' updated brand positioning and tone of voice to drive awareness and consideration of the Journeys brand through digital, social, and other media, and ultimately building new footwear demand creation capabilities. And finally, elevating our consumer experience. We are introducing an updated store concept, which retains the Journeys energy and DNA in an environment designed for the style-led teen who shops across footwear brands and categories, with 10 initial locations open to date. Strengthening our brand positioning and elevating the consumer experience on journeys.com to enhance the transactional approach we've been delivering. And lastly, evolving our All Access Membership Program, where we've already signed up over 4 million members in a little over a year to provide a more personalized experience and increase long-term customer value and retention. These actions will solidify Journeys' leading market position for the longer term, and we look forward to sharing more details of this plan with you going forward. In closing with our outlook, we're pleased with the upside we delivered in Q3 and the momentum we've carried into Q4. For Journeys, we're optimistic we're in a position to drive solid results over the remainder of the year. While at the same time, based on recent trends, we've adopted a more cautious view for Schuh and Johnston & Murphy. This all results in us modestly raising our view for the year. And Sandra will take you through the specifics. Before passing the call, I'd like to thank our incredible people. Our unmatched ability to reinvent ourselves, evolve and grow over the years with a profound understanding of what our customer wants is our true competitive advantage and real cause for celebration with our 100th anniversary as a company this year. The work you've done has positioned us well for this busy holiday season and I look forward to continued success as we finish strong in fiscal ‘25 and build on this momentum to unlock the considerable growth and value in our company in fiscal ‘26 and beyond. And with that, I'll turn the call over to Tom.

Thanks, Mimi. We were pleased that results for the quarter exceeded expectations. Getting back to positive comps at Journeys provides us with great upside to drive earnings per share meaningfully higher year-over-year, given the cost reductions and share repurchases we have made and overall leverage in our operating model. Turning to results, consolidated revenue for Q3 was up 3% to $596 million, which was better than we anticipated and significant, given the calendar, which included the shift of a strong back-to-school week into Q2 last quarter. The shift negatively impacted sales by approximately $17 million or another 3%. In addition, the Journey stores we closed over the last year, which drove a roughly 4% reduction in the size of our total fleet, resulted in improved overall productivity and had only a 1% net impact on total sales. We continued to drive our digital business, which grew to 24% of direct-to-consumer revenues. Total company comps were up 6%, with stores up 4% and e-commerce up 15%. This was a major sequential acceleration from the negative 5% and negative 2% total comps we reported in Q1 and Q2 respectively. Overall, gross margin was down 30 basis points compared to last year. By division, Journeys' gross margin was down 80 basis points due primarily to product mix as we are selling brands with lower initial margins, but higher average selling prices. Schuh’s gross margin decreased 20 basis points and J&M's gross margin was up 170 basis points due to improved initial margins, lower markdowns, and channel mix. Lastly, Genesco Brands' gross margin was up 330 basis points due to improved initial margins. Moving down the P&L, SG&A expense was 46.1% of sales and improvement of 10 basis points compared to last year. The combination of our cost savings initiatives, the closure of unproductive stores, and some improvement in other expenses offset the increased variable expenses to support our direct sales growth, as well as additional selling salaries and marketing expense. Optimizing our store fleet to reduce occupancy costs and fixed expense levels in the store channel remains one of our key financial objectives. In Q3, we achieved a 4% reduction in straight line rent expense on 67 lease renewals across the company with an average term of approximately three years. This brings our year-to-date renewals to 231 with an 8% reduction in straight line rent expense. Looking further at cost savings, we continue to gain traction on our plan to reduce costs by $45 million to $50 million on an annualized basis by the end of fiscal 2025 before reinvestment. The initiatives include lowering occupancy costs to improve store profitability, as well as optimizing our inventory, warehouse, freight and logistics costs, and other procurement efficiencies. Summary for the third quarter, we incurred a better-than-expected adjusted operating income of $10.3 million, compared to $11 million for Q3 last year. Keep in mind, the 53rd week shift negatively impacted Q3 operating income by approximately $5 million to $6 million or $0.35 to $0.40 per share. Turning now to capital allocation and the balance sheet, we ended the quarter in a net debt position of approximately $67 million with clean inventories, up 1% from last year. We plan to build up our inventory levels, especially for Journeys, to drive Q4 sales and be well positioned to drive sales in the first half of fiscal year ‘26. Looking at our financial flexibility, our strong balance sheet and free cash flow generation combined with our revolving line of credit provide us with ample liquidity to pursue all our strategic objectives. Capital expenditures in Q3 were $13 million with investments primarily directed to retail stores and our digital and omni-channel initiatives. After a cycle of investment in digital and omni-channel where we are currently getting the benefits, we are shifting the emphasis to investment and refreshing our store base. We opened two stores and closed 14 stores, ending the quarter with 1,302 total stores. Year-to-date, we've closed 41 Journey stores. We expect to close up to 10 more Journey stores this year as part of our program to optimize our store fleet in order to best serve the shopping habits of today's consumer. We expect these closures to eliminate approximately $14 million of annualized SG&A cost, which is incremental to the roughly $25 million of annualized savings we realized from the stores we closed last year, and the $45 million to $50 million of run rate savings we are targeting for this year. These actions to reshape our cost structure are designed to strengthen the economics of our store channel and enable investment in our strategic initiatives to drive top-line growth. Lastly, during the quarter we repurchased almost 18,000 shares for $0.4 million, or an average cost of $24.50 per share. We have $42.3 million remaining on our current authorization. Over the past six years, we have repurchased nearly 50% of our outstanding shares. Let me now turn it over to Sandra for guidance.

Thanks, Tom. With third quarter results coming in ahead of expectations, we are raising our full-year EPS guidance to $0.80 to $1, up from our prior range of $0.60 to $1. We now expect higher sales in total, driven by Journeys, partially offset by a more cautious view for Schuh and Johnston & Murphy for the balance of the year. We also expect some additional expenses. For Journeys, the fourth quarter has started well, thanks to the consumer-focused investments we have made in our brand, combined with the positive adjustments to the product assortment. And we expect Q4 comps to be positive, although not at the level we saw in the third quarter. We now expect sales at Schuh to be somewhat more muted than our prior expectations given the weak market demand in the U.K., and we expect the ongoing weakness in the premium men's footwear category to put more pressure on Johnston & Murphy. Combining all these factors, we now expect full-year total sales to be flat to a decrease of 1% versus our prior expectations of down 1% to 2%. Excluding the 53rd week impact, which we estimated to be approximately $25 million of sales and a small negative effect on earnings per share, we expect sales to be flat to slightly up year-over-year, with the back half accelerating meaningfully over the front half. By division, total year-in sales compared to last year are expected to be a low-single-digit increase for Journeys. For Schuh, we now expect sales to be relatively flat. And for Johnston & Murphy, we expect to be down mid-single digits, including the impact from the Johnston & Murphy store closings. Shifting to gross margin. We do expect to be somewhat more promotional in some of our businesses in the fourth quarter, but had a pick-up in gross margin in Q3. Although we still expect gross margin to be impacted by the shift in consumer demand to lower margin athletic footwear, our cost savings initiatives should help offset this pressure. Therefore, we will still expect overall gross margin to be down 10 to 20 basis points versus last year. We now expect adjusted SG&A as a percentage of sales to be in a range of flat to 10 basis points of leverage, compared to our prior guidance of flat to 20 basis points of leverage. This is largely the result of higher incentive compensation that was triggered by our stronger performance. Our guidance assumes no additional share repurchases, which results in a fiscal year ‘25 average of approximately 11 million shares outstanding, and we expect the tax rate to be approximately 27%. To close, we are streamlining our operations and adapting swiftly to the changing consumer demands. These strategic changes will create a more efficient company that better serves our customers, enhances profitability, and creates greater value for our shareholders. Operator, we are now ready to open the call for questions.

Thank you. We will now begin a question-and-answer session. Our first question comes from Mitch Kummetz with Seaport Research. Please go ahead with your question.

Yes, thanks for taking my questions. I guess first off, I want to thank Tom again for all the help he's provided over the years. And Sandra, welcome. I look forward to working with you. As far as Mimi, you talked about early innings and I'm curious, I want to start with the assortment. You made a lot of progress there, but where is it relative to where you'd like it to be? How much opportunity is there for better access, better allocations, still changing some of the brand mix? And like to what extent are the brands taking notice and looking at the strong back-to-school results? And how does that help you going forward in terms of improving your access and allocations?

Mitch, thank you for that introduction and the acknowledgment of Tom as well as the welcome to Sandra. Regarding the changes in the Journeys assortment, we've discussed how consumers went through a significant purchasing cycle after the pandemic and now have filled closets. They are seeking new and innovative items. We've also had a long phase where our customers preferred Canvas products, which we refer to as Vulcanized. That has been quite successful for us. Currently, we observe that our customer base is diversifying in their style preferences and exploring more wearing occasions. Journeys is well-positioned to capitalize on this trend, which translates to a broader range of brands for us. Our back-to-school success was driven by several brands, not just one or two. There is a noticeable fashion shift from our previous focus, and consumers are gravitating toward more seasonless assortments. I believe our merchant team is robust, and we've strengthened it by bringing in Chris Santaella and Andy Gray. We consistently rank as one of the top partners for brands in the casual market, and their efforts have helped us enhance our relationships within the athletic segment, catering to the desires of our teams for both categories. Our brand partnerships are solid and growing stronger, especially in light of our notable back-to-school performance. This isn't merely about asking for more allocation; it's a collaborative approach to serving our customers effectively, particularly Team Girl, whom our brands are eager to reach. We are dedicated to providing an exceptional in-store experience, and we have excellent staff who assist our customers. As we mentioned, we are just at the beginning of what we envision for restoring the Journeys brand to its historical sales and profitability levels, and we aim to build on our current progress.

And then, Mimi, on the stores, really two parts to this question because you're closing some stores and then you also have this new store design. So first of all, I'm curious to know, as you close stores and continue to close stores, what are you seeing in terms of the productivity of stores that remain open in those markets where stores are closing? It sounds like you're not seeing much of a sales hit in general a little bit. So I would imagine that some of those stores, we'll see a productivity lift when they're in a market where there might be other stores of yours closing. So maybe you could just kind of go through that? And then also on the new store design, it sounds like you've had 10 stores open there. I don't know if there are any early results that you could speak to. But I guess more so, can you talk about what you see as being the rollout there and kind of the potential for that longer term?

Certainly. We are focusing on optimizing our footprint rather than simply closing stores. Due to changes in consumer shopping patterns, there's a need to serve customers in different ways. Our advanced store analytics help us understand demographics and other factors, allowing us to make informed decisions about store closures. When we close stores, it's typically in less productive areas, impacted by changes in traffic patterns and shifts toward other shopping options. We have enhanced capabilities to direct traffic to nearby stores or online options. Our goal is to optimize our store footprint in light of these changes. While some locations are less productive, our overall strategy is to boost productivity in our best locations, making them even more effective. This involves adjustments to our product assortment and necessitates visible changes in our stores. We are excited about this aspect of our plan. With our new positioning and product assortment, we aim to create a more aspirational shopping environment that highlights premium products. This setup is tailored for a style-oriented customer who shops across various footwear brands and categories. Our spaces are designed to be cleaner and feature a more neutral aesthetic, enabling us to showcase our brands while maintaining the energy and DNA of our journeys. It's an open shopping experience, and while it's early days—we opened our first store in October—we are pleased with the initial results and will continue to monitor them closely.

And just again to follow up, can you say what the rollout plan is as you go into next year?

We have opened 10 stores so far this year and plan to open about 15 in total. We have a similar number planned for next year, but we want to see some results first. We have been collaborating closely with our real estate teams and our landlord partners, who are very enthusiastic about this. We typically pull forward some remodels during lease renewals, and if the results meet our expectations, we can accelerate some of these plans. We are anticipating significant growth, with these new stores expected to generate better comparable sales than our other initiatives. So far, we have opened 15 stores this year, and we have at least the same number planned for next year, along with the potential to expedite some projects.

Okay. Just a couple more things. First, regarding the Journeys comp, you've increased the full-year comp guide. For the fourth quarter, Sandra mentioned it would be positive but not as strong as the previous quarter. That's quite a broad range, so could you provide more specifics? Are you expecting low-single, mid-single, or high-single digits for Journeys in the quarter? Also, how is the business performing so far this quarter? Is the current performance in line with your overall expectations for the quarter? Lastly, I have one more question.

Journeys is indeed unique in the market. While others experienced a solid back-to-school season, we anticipated that many consumers would hold off on purchases during slower periods. However, this was not the case for Journeys. We transitioned smoothly from back-to-school into winter, with consumers actively purchasing both winter and fall items. Therefore, we are optimistic for Q4. Although Journeys had an 11% comp, it's not as high as we saw in Q3, and we are uncertain if winter buying was pulled forward. This is something important to consider. Regarding our current business performance, I’ll also touch on Black Friday in November. The calendar dynamics are significant, but I believe we are on par with our expectations for Black Friday and November, and we're satisfied with the outcomes. Journeys did not engage in heavy promotions, unlike other sectors of footwear, especially athletic footwear, which was much more promotional. The strength of our product assortment has propelled the business forward without needing to engage in significant promotions, leading to a lot of full-price sales. We are adequately positioned with our inventory for the fourth quarter and will fully leverage our business potential.

Could you elaborate on your priorities for Journeys regarding new demand creation opportunities? Are you considering more digital advertising or applying analytics to your 4 million loyalty members to be more targeted in the market? What specific new demand creation opportunities are you seeing?

Certainly. We are focusing on various strategies to enhance our digital business, which has significantly grown since the pandemic. We have established a loyalty club that has shown positive results across all our operations. Understanding our customers better through loyalty programs and CRM is allowing us to improve our service. To generate demand, we are emphasizing the brand purpose around Journeys and communicating that to consumers more effectively, ensuring that Journeys becomes a primary choice for teens in our strategy. This effort goes beyond just returning Journeys to its previous state; we aim to elevate it to new heights. We recognize the potential to reach a broader audience of teens who may not yet be aware of Journeys. To address this, we have appointed a new Head of Marketing from Levi's, who has strong insights into the teen market. We are actively enhancing our social media presence, particularly on TikTok, and we have new creative support to boost our brand messaging across stores and online. Additionally, we plan to increase our investment in brand marketing to communicate our refreshed positioning. Overall, our strategy incorporates expanding our presence, increasing marketing investments, and engaging with customers across various platforms.

Great, thanks. Good-bye.

Alright, thanks Mitch.

Our next question comes from the line of Mantero Moreno-Cheek with Jefferies. Please proceed with your question.

Hello, and thank you for taking my question. I want to start by discussing Journeys. In the last quarter, you mentioned the improved assortment in Journeys, and you highlighted it again today. You also noted that the holiday offerings performed well during Black Friday, which is encouraging so far. Is there anything else you’d like to share about how we should view the remainder of the holiday season given the fewer shopping days? Additionally, you mentioned strong performance in footwear and outerwear. Could you elaborate on what areas might not be performing as well? What strategies do you have in place to enhance the performance of those underperforming segments in Journeys?

Sure. So as I said, we are quite pleased with the assortment that we have in place. The assortment between back-to-school and holiday shift. There is more opportunity to be able to sell what's typically known as more cold weather product. But having said that, we have observed that our team customer is pursuing just really seasonless fashion. They are wearing sandals and clogs in the winter; we have a great assortment of clogs which is driving our business. We expect during holiday, we brought in significantly more product aligned with the brands that we believe will drive our business at specific items. The footwear market right now is very focused on must-have products. We work on a model of scarce allocated product. And we create the demand in partnership with our brands to say that you need to buy it now because if you don't, it's going to be sold out and you can't find what we sell everywhere, and the allocation model means that there is going to be more demand than there is supply in the market. And so we believe we're well assorted and what the consumer is looking for, thanks to the changes in our assortment and that we have those key items that will support the demand for the holiday. In terms of strength in footwear, I would say that we've talked a bit about boots. And boots are typically something that sell this time of year, the last at least couple of years. The demand on the part of the consumer for boots has not been as strong. So I'll talk about that for a minute and just say that we are not necessarily planning boots up. But we have seen and we're leaning into the trend for shorter or mini boots and a lot of moccasins are out there. And as we go into the season this year, whether the category, it's going to be very focused on specific items and specific brands.

You mentioned that there's a more promotional operating environment and that the product mix is contributing to a lower gross margin. Can you provide any early insights on how we should consider margins for next year?

We have discussed the promotional environment and product mix separately. We are actually less promotional in Journeys compared to last year. The changes to our gross margin are not due to increased markdowns or promotional activity; rather, it's about the product mix. We are shifting from Canvas and Vulcanized products, which typically have higher initial margins, to a broader range of casual and athletic brands that generally start with lower initial margins. However, the positive aspect is that we are seeing higher average selling prices, which helps us maintain that balance. Looking ahead to next year's gross margin, we will be anniversarying some of this in the latter part of the year, but we might experience some fluctuations in the early part of the year as we adjust our product assortment. We have already been anniversarying the Canvas sales and margins for some time now, so we expect that to stabilize over time.

Okay. Perfect. And then just one more for me. We discussed how e-comm performed well across the board and then also performed a light journeys. And I just wanted to ask, is there anything else to add about how the opportunity that exists for journeys at e-comm? And anything else you want to add to how you're thinking about your e-com going forward?

Sure. So our Journeys team drove really tremendous e-com performance over this last quarter. And certainly, it was a good product, but it's also lots of the actions that they have been taking. And we have gone through an investment cycle in digital and in technology over the last several years with everything from improving our real-time inventory to new order management systems to new front-end upgrading as well. And so when we think about the opportunity for e-com for Journeys, Schuh is really very much the same business over in the U.K. And while the U.K. market is more advanced for digital, our shoe penetration is at 40%, we talk today about how Journeys is less than 20%. And so perhaps we don't get to 40% with journeys, but we still think that there is quite a lot more opportunity to be able to drive digital sales. And it is an important part of our plan going forward is really being able to elevate the consumer experience online to use our CRM and our data analytics capabilities that we have been working very hard to build. And we believe that's going to drive the next wave of growth for us in e-com.

Thank you.

Thank you.

Thank you. Our next question is a follow-up from the line of Mitch Kummetz with Seaport Research. Please proceed with your question.

I have a couple of follow-up questions. First, regarding Journeys, if I recall correctly, during the fourth quarter last year, you mentioned that it was heavily reliant on key items, and there simply weren't enough available. Historically, Journeys has done well, but there were times when you ran out of items to guide consumers to alternatives, which wasn't the case a year ago. As you assess the current business and look towards the fourth quarter for Journeys, do you now have a greater supply of these key items? Are you expecting that as you eventually run out, you'll be better equipped to direct consumers to other products this year? Is that the correct way to think about it?

Mitch, you have a great memory. Last year, we emphasized that our business was primarily driven by key items, and this year has largely remained the same in that regard, especially as we approach the fourth quarter. Customers have become more fixed in their preferences, wanting specific products rather than alternatives. On the positive side, we're seeing customers willing to pay higher prices, which allows us to meet their needs. This year, while customers will still focus on key items, we have enhanced our offerings with greater depth in several important products and increased variety across more brands. Our business has been supported by not just one or two brands, but rather by seven or eight, making our broader and deeper approach a stronger strategy for success this year.

Lastly, you mentioned in your prepared remarks about Schuh that you are hoping to have better access to key brands going forward. Can you walk us through that? Will you be leaning on the new Journeys team to help drive that, or is it mainly about the Schuh team leveraging off one another? When do you expect this to happen? Do you anticipate improvements as early as spring, or will it be more in the latter half of next year?

So Mitch, the Journeys and Schuh businesses operate similarly on both sides of the Atlantic. Eight of the top ten brands are common between Journeys and Schuh, creating significant synergy in our brand partnerships. There is a robust exchange of knowledge, trends, and experiences among the teams. We rely on each other for exclusives, sharing some of the same products between Journeys and Schuh. Schuh's performance has been exceptional post-pandemic, especially considering the challenging consumer environment, which has been tougher than in the U.S. with higher inflation and low consumer confidence. Despite this, Schuh has successfully increased market share, leveraging strategies from the Journeys playbook. The brand access and marketing pillars we've established have also contributed to this success. Brands appreciate the opportunity to display their products in a physical setting, and Journeys and Schuh provide that platform. We have exciting prospects for sharing customer insights and enhancing our relationships with brands, particularly with that Team Girl demographic. We're optimistic about accessing better products in the coming spring and anticipate improvements in the business, although consumer challenges will remain.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Ms. Vaughn for any final comments.

Thank you for joining us today. We look forward to speaking with you all when we report our year-end results and holiday performance. Have a great holiday.

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