Earnings Call Transcript - GCO Q1 2026

Operator, Operator

Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2026 Conference Call. Just a reminder, today's call is being recorded. I'll now turn the call over to Darryl MacQuarrie, Senior Director of FP&A and IR. Please go ahead, sir.

Darryl MacQuarrie, Senior Director of FP&A and IR

Good morning, everyone, and thank you for joining us to discuss our first quarter fiscal 2026 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 a presentation summarizing our results here as well. With me on the call today is Mimi Vaughn, Board Chair, President and Chief Executive Officer; and Sandra Harris, Senior Vice President, Finance and Chief Financial Officer. Now I'd like to turn the call over to Mimi.

Mimi Eckel Vaughn, Board Chair, President and CEO

Thanks, Darryl. Good morning, everyone, and thank you for joining us. Following the significant momentum in last year's back half, we are pleased with our start to fiscal '26 with both sales and operating income coming in nicely above our expectations and last year. First quarter sales growth once again outpaced the industry, highlighted by an overall 5% comparable sales increase above the high end of our full year guidance range, led again by strong Journeys results. Our overall comps were relatively consistent for February and March and April combined, highlighting the strength of our assortments as we transitioned out of winter and into spring. Journeys comps increased high-single digits as the initial phase of our strategic plan to accelerate growth extended its momentum and Journeys continued to gain market share. The consumer environment remains choppy, and with recent first quarter events, this choppiness has become more pronounced. Consumers show a willingness to shop when there's a reason like we saw over Valentine's Day and Easter and retreat when there's not. And they remain quite selective. Our merchant and product teams continue to innovate and add freshness to our assortments to satisfy shoppers who are looking for must-have product and a reason to buy something new and who are passing on everything else. We know that in this environment, it is compelling footwear and freshness that motivate the consumer to purchase, and we've taken major actions to respond to these consumer needs. First quarter results are evidence of this outstanding work with all channels posting positive growth. Comparable sales increased 5%, our third consecutive positive increase with both stores up mid-single digits and online up high-single digits and wholesale channel growth of 5%. Journeys comps were strongly positive for the third consecutive quarter as well, up 8% and Schuh continued its positive comp run from Q4. Operating expense leveraged 170 basis points, benefiting from our ongoing cost reduction efforts and operating income and EPS improved year-over-year, thanks to the higher sales and better expenses. EPS would have been $0.05 better in Q1 had we not opportunistically bought back shares, which will ultimately benefit the full year. Before I give more color on the quarter and our strategic growth initiatives, I'd like to address the uncertainty with respect to tariffs, which I know is on everyone's minds and our active mitigation efforts. We've built a solid track record of successfully evolving our businesses and shown our resilience when confronted with economic, consumer and fashion disruption, which we demonstrated most recently coming out of the pandemic, and we are demonstrating once again with Journeys right now. The traction we're achieving and the continued strength of our footwear-focused strategy and initiatives give me confidence in our ability to navigate the current trade environment while building on our recent success. In summary, we are well diversified across a number of brands we sell. We have limited and reducing exposure to China sourcing, and we are implementing many actions to mitigate the impact of reciprocal tariffs. Thus, we are well positioned to navigate this. While there is some immediate impact, and assuming tariffs remain close to levels where they are today, our teams are working hard to offset much of the impact this year. To dimension this, we need to talk about our retail business where we buy and sell a mix of in-demand brands and our branded business where we source our own product. Retail is the largest portion, at more than 80% of sales, namely Journeys and Schuh. Schuh is a quarter of this 80% and since it is U.K.-based, is largely unaffected directly by reciprocal tariffs. For Journeys, our top vendors are a mix of mostly larger premium global brands with diversified sourcing. While this situation is quite dynamic and evolving, to date, a limited number of our vendor partners have notified us of immediate price increases in response to reciprocal tariffs. We do expect price increases over time, but know our brands are working to mitigate tariff cost pressure and ensure key franchises remain stable. Brands with momentum, as usual, have more ability to take price, and we anticipate that our partners, like us, will remain flexible and respond accordingly to any changes in tariff rates versus current levels. We do not expect to absorb gross margin reductions. The biggest unknown will be the consumer response to price increases and inflationary pressure in general. We will be in constant communication with our brand partners to relay and react to this dynamic. Our experience shows that customers continue to engage and shop with us when we offer the best brands and the highly coveted footwear they desire, positioning us well to manage through this impact. Now to our branded side, Johnston & Murphy and Genesco Brands Group, where we source product directly. Overall, for Genesco and including our retail business, we estimated at the start of the year that a little over 10% of our products are subject to China tariffs with branded representing about half of this at 5% weighted toward Genesco Brands. Over the last several years, we've been working diligently to reduce risk across our supply chain with a concerted effort to diversify our countries of production. These efforts have meaningfully paid off with dramatically lower dependence on China and a path to be almost completely out of China in short order as needed. Over the last two months, our teams have swiftly and continuously evaluated our product lines and sourcing plans and taken aggressive action to minimize the reciprocal tariff impact. At the current rates, we estimate the reciprocal tariffs in our branded business would result in unmitigated cost increases of roughly $15 million this fiscal year. We are taking the following actions, among others, to mitigate this cost pressure, accelerating, increasing or canceling inventory to take advantage of tariff windows, further diversifying suppliers and resourcing to countries with lower tariffs, working with long-standing factory partners to reduce costs and planning for strategic price increases targeted more toward the back half of the year, coupled with demand generation investments. While reciprocal tariffs have delivered considerable new challenges, as I said, we see a path to offset much of the impact this year. We are playing offense and we will capitalize on opportunities we see emerging. I want to sincerely thank our people across our company, especially in our product and supply chain areas for working around the clock and for the tremendous efforts you have put forth. I've seen you take some remarkable actions to put the company in a much better place. It's the ingenuity and determination of our highly experienced teams, working with our valued brand and factory partners, and the high level of execution that allowed us to succeed in times like this before, and I am confident will again. Now for Q1 color and growth initiatives for each business, starting with Journeys. Our number one priority this past year has been to improve performance of the Journeys business. After bringing in a new President, Chief Merchant and Chief Marketing Officer, the first phase of our strategic growth plan focused on injecting the product assortment with more newness and excitement, which drove a noteworthy double-digit comp increase in the back half. Excited about these results, along with Journeys' distinctive team proposition and enhanced focus on the teen girl, our key brand partners are further stepping up in support of our strategic direction to better serve this customer through elevated product and depth. The growing strength of our assortment drove robust comps again in Q1. This comp strength was broad-based with seven brands across both athletic and casual posting double-digit gains. The strongest gains were with athletic brands, although athletic and casual are well balanced in the Journeys assortment. Vulcanized or canvas footwear is still pressured, but with diversification and growth of these other brands and positive consumer reaction to trends like low-profile and 2000s running inspired styles, these increases are driving healthy growth overall. Journeys drove strong gains in Q1 store conversion and transaction size, more than offsetting softer traffic when consumers pulled back from shopping outside of peak periods. We were pleased to see Journeys comp strengthen through the months of the quarter. We expect the same brands and trends to drive Q2 growth. And while not dependent on this to drive results, we are also excited about some new brands we have been introducing or reintroducing at Journeys as well. We have built inventory as planned in support of this growth. This inventory is high quality, and we have a strong track record of working with our brand partners to manage inventory to protect margin in times of volatility. After reviewing our other businesses, I'll briefly highlight the exciting initiatives that drive Journeys' strategic growth and transformation. Staying with retail and moving to Schuh. Comps increased low-single digits for the second consecutive quarter, benefiting from Schuh's work on brand and product elevation and improved access to top brands and styles. In a very challenging retail environment, by sharpening its customer focus and intensifying the messaging around the brand, Schuh is becoming more important as a key destination for its youth shopper for casual and athletic footwear. Like the U.S., the U.K. consumer remains very selective, putting pressure on the footwear category and purchases in the quarter overall. Key brands and must-have styles drove conversion with the same brands as Journeys driving the business. At over 40% of sales, Schuh's advanced digital capabilities and highly penetrated e-commerce business remains a key channel for consumer engagement with digital sales growth outpacing stores in Q1. Additionally, the kids business continued to perform well. We are excited to build on the enhanced brand partnerships and improved product access Schuh has gained so far. Through our partnership strength, we have already secured significant further improved product access with Nike and New Balance with exciting new styles and iconic franchises arriving this quarter. Turning now to Johnston & Murphy. After two consecutive years of record sales resulting from J&M's strategic repositioning to a more casual, more comfortable lifestyle brand, we've been working on delivering fresh and distinctive product in response to the headwinds J&M experienced last year. While comps were down 2% in Q1, we were encouraged to see growth in store conversion and transaction size, demonstrating positive consumer response to the assortment and purchase intent, especially for new product. Both full-line retail stores and online comps were slightly positive, offset by factory stores where a more price-sensitive customer retreated and caused larger store traffic declines. One exciting product callout that speaks to the ongoing repositioning is the success of the Anders sneaker, which is the spring season's best-selling style. This updated and refined approach to a classic sneaker highlights J&M's ability to deliver casual lifestyle products while staying true to its DNA. We've also enjoyed a resurgence in dress shoes with our reimagined Upton Dress program. Blazers and outerwear were standouts as well. The brand continues to ramp up innovation efforts, delivering a 15% increase in new footwear constructions in the first half this year and even more freshness with a 60% increase in the back half in addition to new fabrics and design details in its apparel program. Accelerating its brand repositioning to build awareness and acquire new customers is J&M's other area of focus. This includes introducing an updated brand book this year, launching a limited edition collection of shoes and apparel in celebration of its 175th anniversary, rolling out its 175 years young media campaign and shifting marketing spend to further support brand building. New stores planned for the back half will also build brand awareness and counteract the deleverage the brand experienced from closed stores in Q1. Rounding out the branded discussion, our strategy to simplify our license portfolio to emphasize key brands and channels continues to benefit Genesco Brands Group. Our efforts to improve the portfolio will be ongoing. New product is resonating with our retail partners and consumers and pull forward sales from sunsetting licenses helped Q1 sales growth as well. It's worthwhile to now take the time to briefly highlight some of the progress we're making in our exciting Journeys transformation plan. While the teen, especially the teen girl, is well served with fashion apparel in the mall, no concept other than Journeys goes across athletic, casual and fashion footwear for the style-led teen. This is the opportunity and white space we identified to build on the traditional strength of Journeys to serve a wider teen audience interested in style and trend that is six to seven times larger than the market we've historically served. We're focused on four key areas to achieve this and to be the destination for where this customer shops for the latest fashion footwear. First, we're focused on diversification and strengthening our product leadership with best-in-class premium footwear brands. We've traditionally been stronger in the casual and canvas categories. A major growth driver is expansion of our premium athletic assortment. In Q1, athletic grew well into the double digits over last year and now represents more than a third of Journeys footwear sales. At the same time, we continue to strengthen and expect growth from casual. It's the powerful combination of all three that defines our footwear leadership. I've said premium a number of times. This strategy is about more customers and more choice product. Product elevation is generating stronger average selling prices, highlighted by an increase of 12% in Journeys Q1 average footwear selling prices. Second, we're investing in our Journeys brand, bringing our updated brand positioning to build awareness with this expanded group of teen customers. You've already seen a change in our brand platform and imagery with continuity across online and stores and style vignettes online in the Journeys blog, showcasing our fashion authority. We're investing further in influencers, content and social, including TikTok and long-form content. One callout resonating with our core youth audience, our Jasmine Big Foot series has racked up 44 million views so far. We'll be launching a fun new brand platform and campaign at back-to-school and investing more dollars behind it, and we're thrilled with the almost 7 million loyalty members we've added in about 2 years. In our third area, elevating our customer experience, there's one outstanding initiative I'd like to spotlight: our new 4.0 store design success. We needed an elevated setting to attract new customers and call attention to our more premium product while at the same time retaining Journeys' energy and brand DNA. Our new store concept has delivered strong results and a sales lift of more than 25%. Our focus is on making the most productive stores even more productive. These stores have meaningfully better traffic, higher conversion and higher average selling prices and have been attracting a larger share of new customers. We now have 39 stores in the 4.0 format. The results have been so compelling; we've pulled forward more stores to remodel this year. By year-end, we expect to have 75-plus stores in this new format, underscoring our belief in this initiative as a cornerstone of Journeys transformation. Fourth, we're unlocking the power of our people. Our store teams are a key differentiator, delivering exceptional service and representing the heart of the brand. Our efforts to double down on selecting and training our people have contributed to improved store conversion we've been achieving. You can see why we're so delighted with Journeys' evolution and the tremendous opportunity that lies ahead. We're in early innings in this strategic transformation with several waves of planned growth to broaden and deepen Journeys consumer appeal. All that said, turning now to guidance. We remain confident in our plan for Journeys and our other businesses, but recognize there's now more uncertainty in the external consumer environment. In Q2 so far, Journeys and J&M comps have been tracking at a similar pace to Q1, while Schuh has had an offset in timing of a sale period versus last year. While we faced some disruption in the second quarter, in particular, because of the shorter time frames to react to tariffs, given our limited China exposure and tariff mitigation efforts, we are reiterating our full year EPS guidance range of $1.30 to $1.70. Sandra will take you through the details, but we're optimistic about our ability to drive our business forward, especially in the second half during back-to-school and holiday when there are more reasons to shop. We have consistently capitalized on key periods, driving outsized volumes during these times and plan to do so again. As the results pay off, we also plan to continue the cycle of store improvement and investment for higher growth. We still have a lot of work to recapture our peak operating profit levels, but we expect fiscal '26 to be another step in the right direction. And now Sandra will take you through the specifics of our financial results and outlook.

Cassandra E. Harris, Senior Vice President, Finance and CFO

Thanks, Mimi. Overall, we were pleased with our first quarter performance, delivering improved results compared to last year, even though the consumer environment became increasingly uncertain in April. Total revenue and comps increased in the mid-single digits. We effectively leveraged SG&A and our adjusted earnings per share loss improved by $0.05 year-over-year. Excluding the impact of opportunistic share repurchases, which were dilutive to EPS for the quarter, but are expected to be accretive over the full year, adjusted earnings per share would have been $0.05 better. Revenue for the quarter of $474 million increased approximately 4%, driven by overall comp growth of 5%, our third consecutive quarter of positive comps, with store comps improving 5% and direct comps increasing 7%. Journeys led the businesses with comps up 8%, followed by Schuh up 1%, while Johnston & Murphy comps declined 2%. Traffic continues to be challenging, but we are seeing improvements in conversion and average transaction size to help offset the traffic declines. The positive contribution from comps were partially offset by lower revenue due to closed stores. Adjusted gross margin for the quarter of 46.7% declined 90 basis points compared to last year. The change in rate was primarily related to an anticipated shift to higher price point, but lower-margin product in both Journeys and Schuh due to the increased penetration of athletic styles, combined with higher promotional activity at Schuh and the pull forward of liquidation product in Genesco Brands Group. Moving down the P&L, SG&A expense was 52.5% of sales, 170 basis points better than the prior year and with the higher sales better than we expected. The improvement was driven by reduced occupancy and bonus expense, along with cost savings initiatives across multiple areas, reflective of the continued benefits from our prior year cost savings program and new reduction initiatives to continue to improve costs across our business. This favorability was partially offset by sales and marketing investments to drive growth. We continued our store optimization efforts, ending the quarter with 65 net fewer stores versus a year ago. The net closures represented 5% of the fleet and 3% of total square footage but only 1% of total revenue. In general, closing these stores were accretive to operating income. For many of these stores, we have also seen positive sales transfer rates that have helped offset any operating loss impact. At Journeys, we remodeled 29 stores into the new 4.0 format in the quarter, bringing the total remodels to 39 since we started the program in October. As Mimi discussed, in these remodels, we've seen well above-average performance in comp with gains in traffic, conversion and transaction size. We will continue to optimize the fleet to better support the consumers' preference to shop both in-store and online and to enhance and improve the in-store experience across our fleet. The performance throughout the first quarter generated an adjusted operating loss of $28 million compared to a $30 million loss for Q1 last year, resulting in an adjusted diluted loss per share of $2.05 for the quarter versus a loss of $2.10 last year. As I mentioned earlier, earnings per share would have been $0.05 better if we had not opportunistically repurchased shares and the lower share count is dilutive in a loss quarter, but will be accretive for the full year. Our adjusted effective tax rate for the quarter was 26.7% compared to 26% in the prior year. Turning now to capital allocation and the balance sheet. Free cash flow for the quarter was negative $120 million compared to negative $40 million in the same quarter last year. We have been working to improve our inventory position with hot product and new brands at Journeys to meet the growth trends of the business. This year, we ended the quarter with inventories up 15% to meet consumer demand at Journeys, impacting our year-over-year cash flow comparison. We expect our inventory growth to be more in line with our sales growth in the back half of the year. Our free cash flow in the quarter is also lower due to higher capital spending this year as we continue the strategic investment in store remodels that we began in the fourth quarter last year. As we navigate the next few quarters, we expect positive free cash flow for the full year, exceeding fiscal year 2025. Our strong balance sheet and liquidity under our revolving lines of credit provides the financial capacity to support our strategic investments. Capital investments in the first quarter were $19 million, primarily directed to retail stores and other initiatives. We opened four stores and closed 26, ending the quarter with 1,256 total stores. Lastly, and as I mentioned earlier, we did opportunistically repurchase about 605,000 shares of our common stock, or about 5% of our shares outstanding during the quarter at an average price of $20.79. We have $29.8 million remaining under our current authorization. Now turning to guidance. We remain appropriately cautious considering the ongoing macroeconomic uncertainties and recent developments in global trade policy that have added complexity to our planning environment. Despite these challenges, we have carefully evaluated a range of scenarios and based on the outcome of those scenarios, we are reaffirming our full-year earnings per share guidance of $1.30 to $1.70. Our guidance reflects the current level of tariffs, along with the impact of our mitigation strategies that Mimi discussed and some degree of consumer pullback. Our guidance assumes that tariff conditions do not materially worsen, our mitigation efforts are effective, and there are no significant shifts in consumer sentiment. We now expect comp sales for the year to be up 2% to 3%, down somewhat from our beginning of the year guidance of up 2% to 4%. However, we now expect a total sales increase of 1% to 2% versus our previous guidance of flat to up 1% due to a more favorable pound sterling rate. Comps continue to be driven by Journeys with total comps higher in the front half of the year as Journeys anniversaries negative comps last year and moderating comp growth in the back half as we go against Journeys strong comps last year. For our other businesses, we are now more conservative around comps based on the consumer pressure on the footwear category in the U.K. market for Schuh and for J&M, especially for the factory channel. This comp growth is offset by roughly $30 million from the impact of net store closures and now helped by a pickup of approximately $15 million from a stronger pound sterling. By division, we still expect Journeys total fiscal year sales to be up low-single digits as mid-single digit comps are partially offset by closed store volume. For Schuh, we now expect total sales to be up low-single digits as favorability in foreign exchange overcomes flattish comps. For J&M, we still expect sales to be up low-single digits. And for Genesco Brands, we now expect sales to be down high-single digits as we manage through the expiration of certain licenses and navigate the wholesale landscape around the tariff situation. For gross margin, we continue to expect the year to be down 20 to 30 basis points, in line with our previous guidance as the impact of tariffs are offset by our mitigation efforts and better margins in our retail businesses. We continue to expect adjusted SG&A as a percentage of sales to leverage 50 to 70 basis points as the decrease in comps and related deleverage versus our beginning of year guidance is offset largely by further cost-saving initiatives this year. In summary, we expect adjusted earnings per share to be in line with our previous expectations due to our tariff mitigation actions, including selected price increases, the better-than-expected performance in the first quarter, FX and the lower share count from the share repurchase. Our guidance assumes no additional share repurchases, which results in approximately 10.6 million average shares outstanding for fiscal '26. We do expect higher interest as we build inventory in the first half, and we expect the tax rate to be approximately 29%. Although we are reiterating the EPS guidance for the full year, the results by quarter will be different as the tariff impact outpaces our ability to implement mitigation efforts in the near term, and we expect a disproportionate effect on our branded businesses, especially Genesco Brands. We expect overall sales for the second quarter to be slightly better than last year, reflecting the improvement in foreign exchange and the positive comps at Journeys are partially offset by store closures. We also expect softer comps for J&M and Schuh and lost sales related to tariffs. For the second quarter, we expect overall gross margins to be relatively flat to down a little year-over-year with the impact of tariffs being partially offset by mix shift in our business. For SG&A in Q2, we are pulling forward marketing investments to drive sales in the back half of the year, specifically for Johnston & Murphy and Schuh. Since the second quarter is a lower volume quarter, this, combined with the lost sales from tariffs, will result in roughly 100 to 140 basis points deleverage of SG&A in the quarter. This results in operating income that is approximately $6 million below last year, or approximately $0.40 to $0.50 below last year in EPS. We also expect our interest costs to be higher in the second quarter than last year and generally similar to the first quarter this year, and I'd like to call out that ongoing uncertainty related to tax reform could introduce greater variability to our tax rate for the second quarter. We expect to end Q2 with approximately 10.3 million average shares outstanding for earnings per share calculations, lower than the 10.5 million at the end of the first quarter. Looking ahead to the back half, we believe that we will have a greater ability to mitigate the impact of tariffs, drive consumer demand as we get into the important back-to-school and holiday shopping periods and that our renewed cost reduction efforts in response to tariffs will help drive nice operating leverage to offset the second quarter results. As we move through fiscal '26, I am confident in our ability to continue growing despite the headwinds, leveraging our deep understanding of what our customers want and our unmatched execution capabilities. We remain focused on unlocking the considerable earnings potential that exists within our business, and I'm excited about the opportunities ahead as we build on the strong foundation we've established. Operator, we're now ready to open the call to questions.

Operator, Operator

And our first question is from the line of Joseph Civello with Truist.

Joseph Vincent Civello, Analyst

Congrats on a great quarter. Just wanted to ask a few questions about the Journeys strength. In addition to some wider assortments with existing partners, we also saw you establish some new relationships last year with some hot athletic brands. Can you talk about the impacts of those on the 1Q comp and give us a little more color on how scaled those assortments are through your footprint?

Mimi Eckel Vaughn, Board Chair, President and CEO

Good morning, Joe. Thank you for being with us today. We are very enthusiastic about the progress we've been making in our Journeys business, which is due not only to our great products but also to various other initiatives I mentioned earlier. A key aspect of our overall strategy regarding product initiatives is to demonstrate our leadership in athletic, casual, and canvas categories to cater to our teen consumers. Demonstrating leadership involves offering the most relevant styles and brands. As we refine our product assortment, our goal is to enhance the brands we already carry. The growth this quarter was largely fueled by our existing brands, but we've also introduced impactful new brands like HOKA. We typically do not discuss specific brands, but since you asked, Saucony is another brand we have reintroduced, and the customer response to these new offerings has been very positive. These brands help to validate Journeys in areas where we haven't traditionally excelled, such as lifestyle running, which is a significant category for our teen consumers. Our brand portfolio reflects our dedication to this category and emerging trends. Generally, we begin testing new brands in about 50 stores and gradually expand from there. Our strategy involves starting small, testing, and responding accordingly. We were very pleased with the feedback we've received so far, and we can quickly scale and allocate considerable resources to drive significant volume when the timing is right.

Joseph Vincent Civello, Analyst

Got it. That's very helpful. And then secondly, can you just talk a little bit more about the trends for the vulcanized product, of course, under pressure, but how did it compare to your expectations? And what do you see for that category moving forward?

Mimi Eckel Vaughn, Board Chair, President and CEO

Yes. Again, I was talking about the overall strategy that we have in the assortment is to demonstrate great leadership across not only canvas, which we've traditionally been known for, and canvas and vulcanized we talk about interchangeably, but also in athletic and in casual, which we are known for as well. We have seen fashion broadening and teams embracing a lot more wearing occasions and Journeys is well positioned to take advantage of this. And so the results, I said, were really good for us. We had seven brands that were up double digits on both the casual and the athletic side and especially strong growth on the athletic side. Our new leadership in Journeys have a lot of great relationships on the athletic side. We see it as an opportunity to be able to continue to build. On the vulcanized side, we have seen pressure on vulcanized. We continue to see pressure on canvas products through the quarter, but the strength of our other brands, the strength of the assortment is more than offsetting and has been more than offsetting that pressure over the last several quarters.

Operator, Operator

Our next question is from the line of Mitch Kummetz with Seaport Research Partners.

Mitchel John Kummetz, Analyst

I've got a few questions. Let me start with the second quarter and the guidance there. Cassandra, I believe you mentioned expecting a positive comparison from Journeys. Could you provide more specifics on that? Mimi, in your prepared remarks, you noted that early in the second quarter, Journeys is tracking similarly to the first quarter. Is your sales guidance for the second quarter based on Journeys achieving a high-single digit comparison, or is there a different assumption incorporated in your outlook?

Mimi Eckel Vaughn, Board Chair, President and CEO

Thank you for your question, Mitch. We were pleased with Journeys' results, which showed an 8% comparable store sales increase in the first quarter. As I mentioned, we are tracking at a similar level to where we were previously. We've observed significant fluctuations in consumer shopping behavior; customers tend to shop less during periods without promotional events and then return to shop vigorously, which Journeys successfully capitalized on. As we move into the second half of the year, we'll start to anniversary stronger comparatives. We're very optimistic about the direction of Journeys' business. Sandra mentioned the overall comparable sales expectation for the year, and we have incorporated our trends into the forecast for the second quarter. We still anticipate a solidly positive comparable sales figure for Journeys.

Cassandra E. Harris, Senior Vice President, Finance and CFO

Yes. And then Mitch, just to add on the second quarter sales, as we spoke about, we do have the favorable FX on overall sales that's coming into the quarter. So that is definitely one of the impacts as to why we're saying we're slightly better than last year. But I also want to remind you that positive comps at Journeys, but similar to what we saw in the first quarter, we have considered consumer softness continuing in our J&M business, specifically in our factory stores. And then also our Schuh U.K. consumer continues to have pressure on them. So those comps for Journeys will be slightly mitigated by our other two businesses.

Mimi Eckel Vaughn, Board Chair, President and CEO

Yes. And overall, the second quarter is just a low quarter for us, and there's not a lot of reasons to shop. So Easter in the first quarter, you have back-to-school or really gearing up for back-to-school and for holiday.

Mitchel John Kummetz, Analyst

So I have two more questions. First, regarding the second half for Journeys, it's clear that this period is crucial for you, especially at Journeys. You'll be facing tougher comparisons beginning in the third quarter. Can you share what kind of comparison you are anticipating for Journeys in the second half? I assume it will be positive. What drivers do you expect will influence these results? How much impact do you think the 4.0 stores will have in the second half? How does your product access now compare to last year, and how might that assist in driving the comparison? Additionally, you've mentioned a trend towards low profile shoes; if this continues, how beneficial could that be for Journeys in the second half? Please elaborate on the factors at play for Journeys in the second half as you approach these more challenging comparisons. And I have one final question.

Mimi Eckel Vaughn, Board Chair, President and CEO

Mitch, you raised a lot of questions, so let's dive in. We are aware that we are facing tougher comparisons for Journeys, but looking back over the past several years, there are plenty of opportunities. The key takeaway is that our strategy is focused on reaching a much larger market, which is six to seven times bigger. We see a chance to cater to the teen girl demographic in a unique way. This forms the foundation of our strategy. In addition to targeting a broader audience, we are also offering more premium products. More customers and better products create significant growth potential. The initial phase of our Journeys program involved improving our product assortment, recognizing that customer preferences were evolving. Thanks to our merchant team, led by Chris Santaella, this change has already shown results early in the year, but we’re just getting started. We will keep enhancing our product offerings. I mentioned the new brands we've launched; however, our focus is on optimizing the allocation of the products we already have. This will further strengthen our product leadership as we enhance our inventory position and build long-term strategic partnerships. This is not just about one year of growth; it's about laying a foundation that we will continue to build on. So, our initial focus is on product. Furthermore, our strategic plans for growing Journeys revolve around serving our customers, making sure they feel welcome, and investing in the Journeys brand. I spoke about our marketing initiatives, and a strong indicator of our direction is our 4.0 stores. These stores visibly demonstrate our changes in product assortment and opportunities for consumers. The store remodels are yielding great results. We have refreshed 39 stores so far and aim for over 75 this year, representing more than 10% of our portfolio. We believe that we can transform nearly 50% of our portfolio over the next few years. The outcomes have been impressive, with those stores experiencing over 25% growth, marking another wave of expansion. As you consider our plans, the initial phase prioritizes product, followed by various initiatives to raise awareness of the Journeys brand, attract new customers, and consistently provide them with excellent products.

Mitchel John Kummetz, Analyst

That's helpful. And then lastly, you mentioned that the consumer continues to be very focused on kind of must-have key items. And you also made a comment that the brands with the most momentum are the ones that are probably best positioned to take price. So when you think about your business and maybe some price increases coming your way, like what percent of your business is kind of must-have key items? And how confident are you that if prices increase on some of those products that the consumer will be pretty willing to spend more to get what they want? And that's it for me.

Mimi Eckel Vaughn, Board Chair, President and CEO

Yes. So typically, when we talk about key items, we're talking about just a specific model. I think when I'm talking about key items now, I'm just really talking about brands, key brands and key franchises. So we have a lot to pick from, Mitch, in terms of where our consumer is going. Again, the momentum across a range of brands has been good, really being able to satisfy what needs the customer has, what brands they're looking for, which styles they are looking for. And it's not just one style, but it's multiple styles that we are focused on. And so we have seen in prior times when the customer gets squeezed that the customer gravitates toward lower price point product. And they're not doing it this time around, and they are stretching up to buy what they want. And so you asked about price increases. We haven't heard a lot yet from our brand partners about price increases. We expect we will hear some about that. But I think that it is the in-demand brands that have more opportunity to take price and the less demand brands don't. So our brands are working carefully through where opportunities are and where they aren't. I think there is really high awareness that there's a lot of price sensitivity in the market, and everyone is trending cautiously here.

Operator, Operator

The next question is from the line of Corey Tarlowe with Jefferies.

Corey Tarlowe, Analyst

Mimi, I just was curious to get your perspective on the recent M&A in the footwear and footwear retail landscape. Does that cause you to think differently at all about the space, your competition and maybe some of your key brand partners?

Mimi Eckel Vaughn, Board Chair, President and CEO

Thank you for joining us this morning and for your question. There has certainly been some activity in mergers and acquisitions in the footwear industry, primarily focused on the performance athletic segment, which has seen some consolidation. When we consider our approach, we emphasize strengthening our position with a team that is style-oriented and interested in a diverse range of athletic products that serve lifestyle purposes. Our focus is on lifestyle, style, and offering a wide assortment across various categories. We feel our positioning is quite distinct from where most of the recent activity has occurred. We're very optimistic about the opportunities at Journeys and our ability to reach more customers with the strategies I’ve been discussing.

Corey Tarlowe, Analyst

That's great. And then just on the gross margin, I was curious if you could maybe talk a little bit more about the impacts in the quarter and maybe perhaps what sticks and then how you think about balancing price increases versus, I guess, cost absorption as it relates to tariffs for the full year?

Mimi Eckel Vaughn, Board Chair, President and CEO

We previously mentioned that we expected to transition from a canvas product to a more athletic assortment. While canvas has the best margin profile, the athletic selection offers the highest price points, resulting in more gross margin dollars. This shift isn't necessarily a negative trade-off. We anticipated some pressure until we reached the anniversary of this shift in the first half of the year, which primarily influenced gross margins. We expect this pressure to ease a bit in the latter half of the year. Additionally, we noted some one-time unusual impacts in the second quarter, but we are actively working to mitigate these due to tariffs. We believe there are no long-term structural issues affecting gross margins beyond what I've outlined. In balancing price increases against cost absorption, I want to clarify that we do not expect tariffs to have a gross margin impact. We are collaborating with our brand partners and focused on rebuilding Journeys' overall margins while keeping a close eye on profitability. We are dedicated to making the best decisions in this area.

Cassandra E. Harris, Senior Vice President, Finance and CFO

Corey, a little more color around the quarter on the margin. I also just want to call out, like I did in the script that we did have a really strong quarter for our Genesco Brands Group, but it was a pull on our margins as we pull forward that liquidation product. And then our second quarter margins, I just want to remind everybody that we did already have in our guidance the first round of tariffs. And so adding the additional round of tariffs, combined with the mitigation efforts that Mimi talked about and a shift as we have less sales in Q2 related to the Genesco Brands business, both for lost sales on tariffs as well as the pull forward in Q1 is the impact on the Q2 margins.

Corey Tarlowe, Analyst

Got it. And then just lastly on inventory. Is there a way to break down what's price versus units in the first quarter? And then how does that shape throughout the remainder of the year?

Mimi Eckel Vaughn, Board Chair, President and CEO

Price was not yet a factor in Q1. I think tariffs went in place. We were already selling inventory in Q1 that we had on hand before tariffs really came into being. So you can know that our ASPs are up pretty significantly. And so there is a trade-off between ASPs and units, and we're trying to hit a sales plan. And we think that our inventory is in really good shape. It is up because we were at pretty low levels in inventory last year. We had sold through, rationalized a lot of the Journeys inventory to keep it clean. And so we were down 20% when we started the year last year. And so there is a buildup to be able to support the sales momentum. And so we feel like we've got the inventory that we need. And our partners work with us no matter sort of what happens through the course of the year to help us to manage inventory in a really positive way.

Operator, Operator

I'll now hand the call back to management for closing remarks.

Mimi Eckel Vaughn, Board Chair, President and CEO

Thank you for joining us. We look forward to speaking with you again on our next quarter's earnings.

Operator, Operator

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