Earnings Call Transcript - GCO Q2 2023

Operator, Operator

Good day, everyone, and welcome to Genesco Second 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.

Darryl MacQuarrie, Senior Director of FP&A

Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal 2023 results. Participants on the call expect to make forward-looking statements. These statements reflect the participants’ 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 the most recent 10-K and 10-Q filings, for some of the factors, including the impact of COVID-19, supply chain issues, and the current economic environment that could cause differences from the expectations reflected in the forward-looking statements made during the call today. Participants also expect to refer to certain adjusted financial measures during the call. All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release and in schedules available on the Company's homepage under Investor Relations in the Quarterly Earnings section. I want to remind everyone we have posted a presentation summarizing our results that is accessible on our website. 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 on our strategic initiatives to drive the business this fiscal year; 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.

Mimi Vaughn, Board Chair, President, and CEO

Thank you, Darryl. Good morning, everyone, and thank you for joining us today. Following last year's exceptional fiscal results, we are satisfied with our second quarter performance and the strength of the first half of this year, as well as the long-term trajectory of our business. After a period spurred by stimulus-fueled consumer spending, which led to considerable sales gains in the first half of last year, we are pleased to see that we continue to advance our business and retain most of those gains. Our focus on footwear has proven effective and has built a more resilient and fundamentally sound business. Over the past few years, we have made significant strides in enhancing our digital presence, strengthening consumer relationships, growing our footwear brands, and optimizing our retail cost structure, which has positioned us well to excel and navigate the current challenging market environment. Our second quarter performance underscores the advantages of our diverse business model. Strong results from Schuh and Johnston & Murphy helped mitigate some challenges faced by Journeys later in the quarter, which were influenced by a tougher macroeconomic landscape affecting certain consumer groups more than others. However, Journeys experienced significant year-over-year sales improvement each month in line with better inventory levels of key brands and styles. This, combined with the strengths of Schuh and J&M, along with careful expense management, allowed us to offset lower overall sales and exceed our expectations for adjusted earnings per share, further aided by a favorable compensation expense adjustment that Tom will elaborate on later. The Schuh team effectively capitalized on recent product and marketing efforts, outperforming its competition in the U.K. due to pent-up demand and pleasant summer weather. Simultaneously, J&M's brand transformation continues to attract a broader, younger audience as consumers look to refresh their wardrobes. Across all our businesses, we have retained most of the digital gains made during the pandemic, growing this profitable channel significantly compared to pre-pandemic levels. Key highlights from the second quarter include: a 10% revenue increase compared to the pre-pandemic second quarter of fiscal ’20, despite having 5% fewer stores. Digital sales surged over 75%, now accounting for 18% of total retail sales, up from 10% in fiscal ’20. Branded wholesale sales more than doubled, fueled by our acquisition of the Levi's business. Our gross margins met expectations despite a more promotional market, and operating income more than doubled compared to fiscal ’20, resulting in adjusted earnings per share of $0.59 versus $0.15 two years ago. Additionally, our business saw increasing retail sales throughout the quarter as we introduced fresh products while managing significant reinventorying tasks amid easing stimulus comparisons. We also returned a considerable amount of capital to shareholders, repurchasing $45 million of stock during the quarter, representing around 6% of our outstanding shares. Moving on to discuss each business, starting with Journeys. The second quarter began positively with May and June benefiting from effective inventory management, reaching pre-pandemic levels for the first time since the pandemic began. However, we did not see the acceleration in sales we anticipated in July, including during the last two weeks of the month, which aligns with the start of the back-to-school season. Sales have since picked up in August, surpassing last year's figures, but we had hoped for an even sharper recovery given our improved inventory position and a more normal back-to-school season. We observe signs of the Journeys consumer feeling the pinch from inflation, leading to reduced mall visits, waiting for tax-free shopping events, delaying purchases, and opting for more affordable footwear options. The strength of Journeys' vendor relationships and diverse product offerings have allowed us to pivot quickly towards more budget-friendly options that resonate with today's more cost-conscious consumer. Despite expecting stronger store traffic, our dedicated store associates have maximized every customer interaction, improving conversion rates and transaction sizes, supported by higher average selling prices as we completed the quarter. I have described the current fashion trend as moving away from high fashion athletic towards more casual styles, which aligns with Journeys' strengths, and we saw casual footwear continue to grow in significance during Q2. Although markdowns and promotional activities increased compared to virtually none last year, well-managed inventory and a focus on full-price selling contributed to better-than-expected gross margins for Journeys compared to pre-pandemic levels. In the U.K., Schuh had a strong second quarter, taking advantage of the market disruptions caused by COVID, which included prolonged lockdowns and various retail bankruptcies reshaping the retail landscape. The Schuh team effectively leveraged its robust digital capabilities to drive online sales and outperform competitors when stores reopened. Schuh is also benefiting from improved product quality, brand purpose, and strategic marketing efforts. This strong Q2 performance was driven by a favorable inventory position that provided access to higher-tier styles from key vendors, coupled with pent-up demand as young customers took advantage of the warm summer weather to dress stylishly for outdoor activities. Schuh's sales exceeded expectations, both on a constant currency and reported basis, despite the pound's decline against the dollar. Constant currency revenue reached a Q2 record, up 9% year-over-year and 14% compared to pre-pandemic sales, with strong demand driving consumer spending despite high inflation rates. Operating income increased significantly when adjusted for last year's rent and COVID-related credits. Like Journeys, Schuh has effectively met the fashion demands of its young consumer base, with casual styles increasing significantly in the product mix, driven by sandal sales and higher prices. Now turning to our brands, we are thrilled about the potential of Johnston & Murphy as we reposition it for growth. Our initiative to transform J&M for a more casual and comfortable post-pandemic environment is yielding excellent results, with Q2 sales up 22% compared to last year, and operating income now more than double pre-pandemic levels. We also saw year-over-year increases, adjusting for last year’s considerable inventory reserve reversals. Growth occurred across all sales channels this quarter, with stores up 13%, direct sales up 16%, and wholesale sales rising nearly 60%. With office return rates still below 50%, J&M is experiencing growth not only from work-related footwear but also from styles that consumers desire for everyday living, increasing our market share. Notably, 9 of the top 10 SKUs in J&M's direct-to-consumer business in Q2 were casual and casual athletic styles. Enhanced consumer messaging along with new and innovative products featuring distinctive technology are contributing to this growth. In our licensed brands division, we have revamped this segment since the pandemic began, adding appealing licenses, particularly Levi's, improving sourcing and product capabilities, and diversifying distribution towards more moderately priced retail outlets. This transformation led to operating profit this quarter, in contrast to an operating loss in Q2 of fiscal '20. While the consumer has also felt the impact of inflation and we are currently realigning Levi's distribution, we are optimistic about this division's future. Looking at the current quarter, back-to-school in the U.S. has had encouraging results thus far, and we were pleased to see the increase in August compared to July's slower start. Nonetheless, our expectations for Journeys' growth this season remained higher, aiming for a high single-digit increase compared to last year. Given our low inventory and stockouts of essential items in the latter half of last year, we believe there were significant sales opportunities missed, and we intended to capitalize on them during this year's back-to-school and holiday seasons. In addition to the trends observed for Journeys customers amid a challenging macro environment, we see shoppers coming out and buying when they have a compelling reason to do so, but retreating to conserve cash during less urgent times. Therefore, we are adjusting our guidance for the back half of the year primarily to reflect the current trends observed at Journeys, which, while still positive compared to last year, are lower than our initial forecasts. The higher-income customers for J&M and Schuh have shown resilience in their shopping behavior, supported by shopping lists and increased traffic compared to last year. We expect these trends will largely continue, although we've adjusted expectations to consider the growing economic pressures that may affect Schuh's customers in the U.K. Our new inventory will be advantageous, and we believe our strong product concepts position us well to capture a larger share of consumer demand, particularly when consumers have reasons to shop. We will manage inventory levels by adjusting orders as necessary and do not anticipate the need for significant markdowns to balance inventories. With this more conservative outlook for the back half, we now expect adjusted earnings per share for fiscal '23 to range between $6.25 and $7, and anticipate that the year will be closer to the middle of this range. We remain confident that our footwear-focused strategy will continue to drive value as we navigate this inflationary phase and ultimately emerge from it. Our strategy consists of six key pillars that prioritize ongoing investment in digital and omni-channel capabilities, enhancing consumer insights, advancing product innovation, optimizing our cost base, and pursuing synergistic acquisitions to drive meaningful business growth. You have heard how several initiatives positively impacted our second quarter results, and I want to briefly highlight a few additional efforts. Under our second pillar, maximizing the relationship between physical and digital channels, we are advancing the off-mall strategy for Journeys. This initiative was designed to capitalize on the noticeable shift in consumer traffic towards local community shopping centers. Research indicates that our target consumers often visit local non-mall shopping centers multiple times a month and prefer shopping close to home. Following our initial pilot locations, we have signed more than 25 off-mall sites, which are larger than our mall store locations and able to carry a full selection of adult and children's products. We have opened five of these locations so far and plan to open an additional 10 by the end of the fiscal year. Given that Journeys has traditionally been mall-centric, we see this as a significant opportunity. At Schuh, we established a new distribution center in Ireland to enhance support for omni-channel sales and improve profitability of our operations in Ireland following Brexit. Under our third pillar, we are boosting consumer insights to strengthen customer relationships and brand equity. Schuh's new loyalty program, the Schuh Club, has been very successful, combining online and in-store purchases to offer personalized experiences to our most loyal customers. Since fully launching in April, sign-ups have exceeded expectations, approaching 750,000 and likely reaching over 1 million by year's end. This improved ability to recognize customers at the point of sale has resulted in a doubling of our data capture since launching the Schuh Club, providing us with valuable first-party data. Currently, club members contribute nearly 30% of total company sales, with their average order value 14% higher than non-members. Johnston & Murphy's insider program, launched last year, is experiencing similar success, with 75% of new customers signing up. Journeys is enhancing brand equity by allowing self-expression through youth culture and significantly increasing collaborations with content creators across social and streaming platforms, resulting in higher engagement on channels like TikTok and Instagram. A highlight of this campaign is our partnership with Karl Jacobs, who has activated exclusive content that engages his audience of 28 million followers across various platforms. These initiatives introduce Journeys to Karl’s gaming community in an authentic and original manner. To position Journeys favorably just before back-to-school, we sponsored the SaaS Summer Festival, hosting events in 18 key markets. Our increased investment in digital and social has enhanced brand recognition and purchase intent. Recent customer research among those aged 13 to 22 has shown that Journeys remains a leading shopping destination, significantly outperforming other footwear retailers as a welcoming, enjoyable place to discover new brands and styles. Under our fourth pillar focused on product innovation and trend insights, J&M's innovation strategy has driven significant growth in the casual athletic category, with its presence in the direct-to-consumer channel nearly doubling to almost 40%. This surge can be attributed largely to the Amherst and Activate collections. Notably, the top Amherst style sold more than double the units compared to our top dress Schuh style, underscoring that this strategic shift towards casual footwear has been very successful with consumers. In summary, we are progressing well with our business operations and strategic initiatives aimed at becoming the go-to destination for fashionable footwear. Furthermore, we take pride in our advancements in ESG. We published our inaugural ESG report on genesco.com, detailing our recent efforts and policies. We continue to integrate ESG considerations into key operational decisions, such as redesigning and reducing shoebox sizes and participating in energy-saving initiatives at the store level. We are committed to expanding our ESG efforts and look forward to sharing our progress with you in the future. In closing, we are adept at navigating challenges and will manage through the current period of high inflation and consumer pressures, similarly to how we emerged from the pandemic as a stronger and more profitable company. At the heart of this success are our remarkable employees, and I want to thank you all for a strong start to the year. Your dedication and creativity allow us to consistently excel in fluctuating environments, and I look forward to our continued achievements this year. I will now hand the call over to Tom.

Tom George, Chief Financial Officer

Thanks, Mimi. As Mimi discussed, we were pleased with our performance during the quarter, especially our ability to drive profits ahead of expectations in the current climate. We have a solid foundation to not only navigate the current challenging environment, but also we continue to be confident in the ability of our footwear-focused strategy to drive strong results over time. Consolidated revenue in Q2 was $535 million, down 4% from last year as we continue to anniversary the significant stimulus distributed a year ago and we experienced foreign exchange pressure from the strengthening dollar. On a constant currency basis, sales were down 1%. As a reminder, Journeys consumer benefited most from the prior year government stimulus. On a comp basis, Journeys total comp was down 8%. Schuh total comps increased 9% driven by stores. J&M continued its strength versus last year in both stores and digital with total comps up 17%. Overall, total company comps were down 2% for the quarter with store comps down 2% and direct comps down 3%. We ended the quarter with 27 fewer stores versus a year ago as we optimize our store footprint and drive productivity in our existing store state. Digital sales, as expected, were down versus last year. However, direct still held on to 95% of its gains on a constant currency basis and was up over 75% versus pre-pandemic on a reported basis. E-commerce sales accounted for 18% of total retail sales versus 19% last year, up from 10% in fiscal year ’20. Wholesale was up as strength in J&M offset the decline in Licensed Brands as we reposition the distribution mix of the Levi's brand to rely less on the value channel. Gross margins were down 160 basis points from last year, but were in line with our expectations. The main drivers of the year-over-year change were Journeys and J&M. The expected decline in Journeys margin is due to a return to a more normalized promotional environment, as compared to essentially none last year. That said, Journeys gross margin still exceeded pre-pandemic levels. For J&M this year, we experienced increased freight and logistics cost as well as a difficult comparison to last year as the commencement of the brand's recovery drove major reductions in inventory reserves. In summary, by business, Journeys gross margin was down 160 basis points, Schuh’s gross margin was up 30 basis points driven by lower e-comm penetration. J&M's gross margin was down 640 basis points, driven by 410 basis points of freight and logistics cost pressure and a 300 basis point unfavorable inventory reserve reversal comparison. And Licensed Brands gross margin was down 40 basis points driven mainly by sales mix and increased freight and logistics costs. Altogether, increased freight and logistics costs put approximately 75 basis points or $4 million of pressure on Q2 gross margin and were the greatest drag in our branded businesses. Adjusted SG&A expense was 45.6%, which was 30 basis points more than last year. It is worth noting that last year we received significant one-time COVID rent credits and government relief during the quarter to the tune of $8 million, which made this quarter a difficult comparison. Without last year's one-time credits, total SG&A and occupancy expenses leveraged 120 basis points and 40 basis points respectively. Regarding wage pressure, the competitive environment and legislative increases in minimum or living wages continue to pressure our selling salaries, but we continue to evaluate efficiencies in this area through our workforce management system, time and traffic studies, and other automation. In summary, deleverage in occupancy, selling salaries, marketing, and other expenses more than offset leverage from lower performance based compensation and other pickups. As a result of the revised outlook for the back half in the way our performance based compensation program is designed, we had a reversal of a bonus accrual in Q2 this year that was bigger than our typical adjustments. It is also worth noting that small changes in year-over-year expenses can have a larger impact on our SG&A percentage in the second quarter due to the typically lower sales volumes. Rent credits aside, we are achieving great success driving occupancy costs lower. Across the company for the first six months of fiscal ’23, we have negotiated 115 lease renewals and achieved a 17% reduction in straight line rent expense with a shorter average term of 2.5 years. This is on top of 192 renewals with a 17% rent reduction last year, with over 45% of our fleet coming up for renewal in the next couple of years, this continues to remain a key priority. A good way to measure the benefits of our efforts to restate our P&L is to compare Q2 adjusted SG&A to the pre-pandemic fiscal year '20 versus fiscal year '20. We leverage total adjusted SG&A by 200 basis points, driven by store occupancy leverage of approximately 300 basis points, which enabled investment to drive our digital business. In summary, first quarter adjusted operating income was $10 million, a 1.9% operating margin, compared to $21.1 million or 3.8% last year and 1% pre-pandemic. Both additional freight and logistics costs this year and the significant COVID rent and other credits benefit last year that I discussed had a considerable impact on these results. For the quarter, our adjusted non-GAAP tax rate was 19.5%, which compares to 25.1% last year. This all resulted in adjusted diluted earnings per share of $0.59 for the quarter, which compares to $1.05 last year and $0.15 in fiscal '20. Our share count is down 11% from last year and roughly 19% from pre-pandemic levels. Turning now to capital allocation and balance sheet. Our net cash position at the end of Q2 was negative $4 million, a $288 million decrease versus last year. During the past 12 months, our strong cash balances and strong cash flow enabled us not only to reinvest in our business for growth, but also to accomplish the formidable task of reinventorying and at the same time returning significant capital to shareholders. While net inventories are up $150 million year-over-year, we believe it's more meaningful to compare this year's inventory levels to pre-pandemic Q2 fiscal year '20 since outsized stimulus demand and supply chain limitations resulted in unusually low inventories last year. Inventories in Q2 this year were $507 million, 14% higher than fiscal '20, on a quarterly sales increase of 10%. Part of the increase at Journeys is we elected to receive and carry over some winter product, which was late in arriving as it consists of core inline styles that will give us a head start on back-to-school and holiday sales. We are pleased with the quality and level of inventory, except for J&M, where much of the increases in transit we are still chasing product. Over the last year, we repurchased 2.3 million shares or almost 15% of outstanding shares for $135 million at an average price of $58.86. More recently for the second quarter, we repurchased $45 million of stock at an average price of $54.99 and now have $55 million remaining on our current authorization. Capital expenditures in Q2, excluding the new headquarters building, were $9 million and depreciation and amortization was $11 million. We opened four stores and closed six during the second quarter to end the quarter with 1,412 total stores. As a reminder, traditionally the end of Q2 and during Q3 through the commencement of the holidays reflect our lowest cash levels for the year, as this is the time for our peak working capital requirements. Looking out to the end of the fiscal year, we expect to end the year with ample cash and a balance sheet that remains a strategic asset. Now turning to guidance and more specifics as to how we are thinking about the business. As I said, we believe we have a solid foundation for growth and are confident in our long-term strategy. In the near-term, however, we are seeing the impact and inflation is having on consumer discretionary spending. Therefore, we believe it's prudent to take a more conservative approach to our back half outlook and are revising our full-year guidance. I'll first talk through the changes in our top line guidance. Our prior annual revenue guidance reflected growth of 1% to 3% over fiscal year '22 or a range of $2.45 billion to $2.49 billion with the midpoint of the range as the most likely scenario. We now expect full-year revenue to be between down 3% and flat compared to fiscal year '22 or a range of approximately $2.35 billion to $2.41 billion. Again, with the midpoint of the range as the most likely scenario. Note that full-year sales results in both our prior and current guidance are impacted negatively by about 2% due to a strong dollar and lower exchange rates. Going into this year, while we knew we had some difficult comparisons to last year, particularly during the first half due to stimulus, we felt that the back half provided good opportunity for growth, mainly due to the replenishment of inventories and having what consumers needed at the key selling periods of back to school and holiday. Driving the projected second half acceleration was high single-digit growth at Journeys as we believe we left a lot of sales on the table last year due to a lack of key product. As Mimi outlined, while trends improved throughout the second quarter, and the start of back to school as the stimulus compares became less pronounced, they didn't reach levels contemplated in our initial projections, which we attribute primarily to the impact on the consumer from inflation. The reduction in our full-year sales guidance is coming mainly from Journeys for the reasons we have described. We have also adopted a more conservative outlook for our businesses that serve a more cost-conscious consumer and in the U.K., where the consumer is increasingly facing economic headwinds, including higher consumer prices and higher fuel costs. Our gross margin guidance remains unchanged, and we continue to expect gross margins to be down versus last year by 60 basis points to 80 basis points, mainly due to increased markdown activity, especially in the quarters in which markdowns typically occur, as compared to essentially no markdown in promotional activity last year. At this time, we are not expecting any additional incremental markdowns in total as we expect to align our inventory levels consistent with our reduced sales levels. In terms of expenses, with the decline in our sales outlook, we now expect adjusted SG&A, as a percentage of sales to deleverage in the range of 50 basis points to 90 basis points, down from the previous range of leveraging 10 basis points to deleveraging 10 basis points. Regarding overall operating expenses for fiscal year ’23, the leverage we gain from reduced performance-based compensation is being offset by recently significant one-time COVID credits, selling salary wage pressure, and marketing costs. The reduction in our sales forecast makes it more challenging to leverage fixed expenses and increased selling salary costs. However, we are actively managing expenses downward and continue to work to mitigate inflationary pressures and limit the effect on profitability from the lower projected sales volume. This all results in an expected operating margin between 4.7% to 5.1%, which is down from 6.3% fiscal year '22 and up from 4.5% fiscal year '20 prior to the pandemic. EPS is now expected to range from $6.25 to $7 per share, down from the previous range of $7 to $7.75 per share and compared to $7.62 last year and $4.58 in fiscal year '20. Note that this new guidance is based on a weighted average share count of approximately $12.9 million for the full year versus our prior estimate of $13.4 million, reflecting our share repurchase activity during the second quarter but assumes no additional share repurchases for the fiscal year. Furthermore, we expect some improvement in the tax rate at 26%, down from the prior guidance of 27%. While we don't provide quarterly guidance, I want to provide some perspective on Q3. We expect Q3 sales to be slightly below last year with gains in our branded businesses offset by flattish sales at Journeys and pressure on Schuh’s top line. We had robust sales in September and October last year at Journeys with a change in pandemic shopping patterns. We are assuming that the consumer will revert to historical patterns of lower shopping activity during this time, saving dollars to spend during holiday, when we expect sales growth will be consistent with back-to-school growth. Regarding Q3 gross margin, we expect lower gross margins compared to last year, but at about half the levels of Q2's reduction, due to higher freight and logistics costs and another difficult inventory reserve comparison last year for J&M. Note that while in total for the year, we do not expect gross margin to change from prior guidance, we do expect a shift with Q3 gross margin under more pressure, due to higher freight costs, which is offset in Q4. We expect there will be a fair amount of SG&A deleverage to last year in Q3, driven by lower sales, last year's one-time COVID relief, and increased marketing and selling salaries. In the end, from a basis point perspective, we expect the SG&A deleverage to be quite a bit more than the gross margin pressure. With all this, we expect Q3 operating income close to pre-pandemic fiscal year '20 Q3 levels with higher EPS compared with the same period, driven by our share repurchase activity. To close, we are pleased with the quarter we just completed, and while we acknowledge the challenges facing consumers these days and the temporary headwinds those might pose, we remain excited about the future of our business and the strategy we are driving forward. Operator, we are now ready to open the call to questions.

Operator, Operator

Thank you. Our first question is from Steve Marotta with CL King & Associates. Please proceed.

Steve Marotta, Analyst

Good morning, Mimi, Tom, and Darryl, congratulations on the earnings beat in the second quarter. Mimi, can you talk a little bit about the move from fashion athletic towards casual at Journeys? How can you capitalize on this? Do you think that you'll have the inventory associated with this shift in place by holiday? And can you talk a little bit about the ASPs between those two silos? Thanks.

Mimi Vaughn, Board Chair, President, and CEO

Thank you for the question, Steve. When considering Journeys, our experienced merchants make informed decisions on the right products, leveraging their extensive knowledge. They've successfully identified fashion trends in recent cycles, which gives us a competitive edge. Transitioning from retro athletic to casual fashion has proven beneficial, as we continue to witness strong demand in that area. While teams typically have athletic fashion items, the move towards casual proves advantageous for us. We're well-equipped to meet customer needs with a broader range of team fashion options today, with a nod to ‘90s styles and even some influences from the ‘80s. Many brands currently trending are being favored over sandals and other summer items. Our inventory levels are adequate; we prepared for back to school and even have a head start on holiday inventory due to late arrivals from the previous holiday. As we approach the later part of the year, we transition more towards boots. Interestingly, the average selling price difference between casual and athletic categories isn’t significant, attributed to the mix with boots and other products. We’ve noticed price increases overall, along with a trend where the Journeys customer is gravitating towards more accessible price point products. Nonetheless, our average selling prices are still on the rise.

Steve Marotta, Analyst

That's very helpful. Tom, can you talk a little bit about what total freight incremental freight dollars are expected this year? And I'm curious how much you think that reverts next year to normal? In other words, could all of those disappear frankly?

Tom George, Chief Financial Officer

Yes, for this year, in total, it's interesting. In total for the year, it's about $14 million to $15 million relative to last year; it's the same number, just sort of sequenced differently. A good amount of that is airfreight, and we would expect in future periods, maybe next year and out years, that we shouldn't need that same level of airfreight. So we should get a benefit in future years on airfreight.

Mimi Vaughn, Board Chair, President, and CEO

Yes. We're also hoping to see that container costs decrease, as they have been higher than historical levels. We're noticing some relief regarding the ability to ship products, which is encouraging. Prices have stabilized and have decreased slightly, but they remain above historical highs. However, as the entire supply chain stabilizes and consumer demand decreases compared to last year, we anticipate that these prices will return to what we hope are historical levels.

Steve Marotta, Analyst

Sure. I'd like to expand on that actually offline. I mean, we have one other question, I know that you would also alluded to the fact that back-to-school started a little bit later this year than would normally be anticipated. There have been times, of course, in the last couple of years with lots of durations amongst the consumer and when and where they purchase. I know it's maybe impossible. They may be covered at this moment, but still potentially comment on what are the odds that to believe this back-to-school season has a longer tail, in other words, same amount of dollars, but simply shifted maybe two weeks forward?

Mimi Vaughn, Board Chair, President, and CEO

That's a great question, Steve. We've noticed a shift in consumer shopping habits for back-to-school over the past couple of years. Typically, this season spans the last two weeks of July, through August, and into the first two weeks of September, totaling eight weeks. However, in the last few years, we haven't seen much activity during this period. Last year, for instance, July and August were softer than usual, but we did experience increased volume in September and October. I believe last year and the year before were atypical, as parents were uncertain about kids returning to school and whether they would stay in school. We attribute these patterns to the circumstances of the last couple of years. This year, we are observing a similar trend. To be cautious, we have anticipated that consumers will return to their historical shopping patterns in September and October. Generally, kids like to wear new shoes when returning to school to see what their friends have. We've discussed how in-the-moment purchases have evolved into last-minute purchases. Therefore, we are cautiously optimistic that these trends will extend into the fall, although we haven't factored it into our guidance. The positive news is that we saw a significant pick-up in August, and we were very pleased with the noticeable improvement from the end of July into August, which is continuing. We’ll monitor what occurs during Labor Day weekend.

Steve Marotta, Analyst

You know, I have one follow-up to that. What do you attribute the swing to? Do you think that consumers have reset their expectations for food and fuel? Do you think that because gas has rolled off, there's been that pickup? What do you attribute the delta between August and July? More on a macro level than a micro level?

Mimi Vaughn, Board Chair, President, and CEO

Yes. You know, interestingly, we saw that back-to-school purchasing early in the cycle for early tax-free wasn't as strong as when we got closer to school starting. I think more people were taking vacations in the back part of the summer this year. There's a lot of pent-up demand on vacations. I think that consumers were enjoying the summer. And so just really flipped into, wow, we've got to go back to school; I think that's a little bit of what has happened. We've seen overall the consumer cycle shift into consumers waiting until the last minute. I think there's just more information out there; it used to be that you'd go and you'd shop your shopping venue, shop them all in other places to see what trends were in style. Well, now you've got that in the palm of your hand, and you can figure that out. You also have a lot more confidence about being able to find the inventory wherever it is. And so that has really pushed just shopping patterns closer to the time of need this year, especially, I think, that consumers were distracted enjoying the summer, and we’ve seen a significant pickup in traffic as we've gotten into August.

Operator, Operator

Our next question is from Corey Tarlowe with Jefferies. Please proceed.

Corey Tarlowe, Analyst

Hi, good morning, and thank you so much for taking my questions. So I wanted to start talking about Johnston & Murphy given, I think, what's very clear is that you've done a tremendous job turning this business around from the start of COVID when everything was locked down and people weren't going to the office, and now you've pivoted the business to be more casual, driving what I believe was a record second quarter revenue for the segment in spite of having fewer stores than prior years, which is incredibly impressive. So can you just talk about what you're doing at that brand that you think is really going to drive sustainable success and growth going forward? And then maybe just touch a little bit on what we can expect from a profitability standpoint as well?

Mimi Vaughn, Board Chair, President, and CEO

Sure. Thank you for that question, Corey. The J&M customer is in a good place. We are delighted by what we are seeing from the brand right now and have great prospects, great prospects in the future for the brand. What has happened in the most recent time is that the J&M customer got used to comfort working from home, and once you experience comfort, it's hard to go back. The J&M team did really a terrific job during the pandemic, taking advantage of the opportunity to rethink the brand; the pandemic gave us a chance to think about how the brand could be different from a product perspective and also appeal to younger customers, and we pivoted harder into casual and comfort. It's really terrific product. There's great styling with special technical features, proprietary chassis systems, great water proving, great moisture wicking, and great comfort features. After the recession, after the great recession a number of years ago, we had a chance to reinvent the brand and were able to double the size of the brand, and think that there is an opportunity to do that again this time around. We have a chance to sell customers things that are not in their wardrobe, things that they need for today's lifestyle. So they're trading in their dress shoes or their more formal shoes for hybrid products, which is great styling with lots of comfort features. Johnston & Murphy has done such a great job repositioning. Right now, we are selling a lot of casual and casual athletic products. I talked about the top styles being casual and casual athletic. In fact, casual and dress casual are more than 90% of the footwear sold today. So dress is getting to be a much smaller portion of the overall sales. We've complemented that with additional categories that really round out the lifestyle offering. Interestingly, we used to worry about casual just trading down price points from dress footwear, but we have actually seen that we've been able to build in great comfort and technology features and have been able to see higher price points. So we like the profitability profile that we see. We like the potential for increased sales. We're spending a lot in marketing right now to let people know about some of the changes in the brand. We've just done a market research study that says that as much as we think everyone knows about Johnston & Murphy, there's lots more potential for additional consumers. So great prospects going forward.

Corey Tarlowe, Analyst

Got it. And then just on the profitability expectations for the segment?

Mimi Vaughn, Board Chair, President, and CEO

Yes. So this year, it's a front half, back half story. We were chasing a lot of product. You saw a great turnaround in sales and really the second and the third quarter. Tom talked about the overall pressure from airfreight, and that's mostly in the Johnston & Murphy segment this year. I think profitability was up in the second quarter over pre-pandemic levels, but less than last year because of some of that airfreight and the inventory reverse. But I would say that we could get back to historical levels. Johnston & Murphy has been as high as double-digit profitability. We went from pretty big losses during the pandemic. We're making good strides this year. And over the longer term, we think there is nothing that would prevent us from getting back to historical levels of operating margin.

Tom George, Chief Financial Officer

Yes, let me just reiterate what Mimi is saying. I mean, if you look at Johnston & Murphy where our expectations are for this year relative to pre-pandemic, you'll see that we really expect where the sales will be a little bit above pre-pandemic levels, and we have profitability won't be the same as pre-pandemic, because we are investing in marketing for growth here. We've got a good opportunity to continue to grow that brand at a good pace. We've got the distribution infrastructure in place to be able to get further efficiencies from the stores. We really see down the road even more upside in efficiencies on the stores going forward, because we sell a lot of apparel as well. And so the stores are a great opportunity for growth. Our digital business, as you've seen, has grown very well; that's double-digit profitability on the margin, so another good thing. And then our wholesale business, again, a good opportunity to get a lot of traction, a lot of good sell-throughs; there's a big wholesale opportunity for Johnston & Murphy going forward. In the end, we cease if we continue to invest in marketing and continue to keep the product development going with new product, we can really grow that brand and take a lot of share in that category and get to even stronger profitability rates than they were pre-pandemic.

Corey Tarlowe, Analyst

That's great. Thanks for the insights. I have one last question regarding a comment Tom made about not expecting any additional promotions for the rest of the year. I'm a bit confused by this, as it seems to contrast with what other retailers are saying about becoming more cautious with promotions. Could you clarify that for me and explain further? I want to ensure I understood correctly.

Mimi Vaughn, Board Chair, President, and CEO

Let me jump in here and then turn it over to Tom. Lots of other retailers right now are just talking about a large amount of inventory in the pipeline, and that is really dictating the need for more promotions. Where we sit in the footwear world, especially the parts of the market that we serve, are certainly less promotional than apparel. The scarcity and supply coupled with robust demand last year let us see the best full price selling environment we've ever seen. So we're normalizing versus that for this year. But our brands took the opportunity to rationalize allocations. We live in a highly allocated space where there's a lot of control and a lot of scarcity of supply in general. We've been chasing product through much of the year and we were still down 25% at the beginning of the year. So we feel like we've just gotten to the right points of inventory where we re-inventoried properly. So we are certainly expecting that we'll have more markdowns this year, because the consumer was just buying anything that was available last year. We did build back in some promotional activity just to help spur demand, as we usually do this year. But what Tom is saying is that we are not seeing that we are going to have to do even more activity than we had planned in order to right-size inventories, because we feel like our inventories are in good shape.

Tom George, Chief Financial Officer

I can provide some perspective on this. What I meant is that there is no change from our previous guidance regarding promotional activity and its potential effects on margins. As Mimi mentioned, we maintain strong relationships with our key suppliers and consistently collaborate with them to optimize inventories. We can continue to safeguard those brands without needing to mark down products. This year, we do expect to implement some markdowns compared to last year, when there were hardly any markdowns. However, our markdown plans remain below the levels we saw before the pandemic.

Corey Tarlowe, Analyst

Understood. That's very helpful. And thank you so much for all the color, and best of luck.

Tom George, Chief Financial Officer

Thank you.

Operator, Operator

Our next question is from Mitch Kummetz with Seaport Research. Please proceed.

Mitch Kummetz, Analyst

Yes, thanks for taking my questions. Let me start just a question on boots; you talked about carrying over some product, and I know that given supply chain challenges last year there were a lot of late receipts. So I'm just trying to understand how much better your position in the category this year versus last year? Can you say what boot penetration is for you guys in Journeys like in Q3 and Q4? And again, any way to sort of give us a sense as to how much better you feel about where your inventory is on boots going into the season, the heart of the season this year versus last? And I have a follow-up.

Mimi Vaughn, Board Chair, President, and CEO

Let me talk about last year and then contrast that to where we are this year. Last year, we really hit supply chain challenges most pronounced in the back half of the year. In the back half of the year, we switched, as you know, Mitch, to a boot assortment from more sandals and fashion athletic assortment. Last year, we were chasing boot inventory all throughout the year. We were in the back half of the year. We were out of stock in core styles. We felt like we left a lot of demand on the table because we didn't have core styles. That was part of the reason that we chose to take that later arriving inventory and carry it over into this year, so we'd be better positioned at the start of the season. So we are in a much better inventory position to begin the season, a lot of supply chain issues have worked their way through the system, and so we expect that we'll get continuous flow of product, and we expect that we will be well positioned to meet the demand in this holiday season.

Mitch Kummetz, Analyst

Thank you for that. For my follow-up on the change in sales guidance, Tom, it seems like the major factor is Journeys. I believe I heard a high single-digit figure mentioned in your discussion about that. I'm unclear about what the Journeys outlook has changed from. Were you initially considering high singles and now expecting a lower number? I didn't quite understand where that high single digits came from. Additionally, regarding the foreign exchange, I heard a 2% figure and I know that the dollar has strengthened since your last report. I'm also curious whether your FX outlook for the year changed as the guidance was revised or if it remains the same. If it did change, how much did it change? Thanks.

Tom George, Chief Financial Officer

Yes. Mitch, regarding foreign exchange, the outlook for the year indicates that the main impact comes from Schuh in the U.K. and a slight effect on the Journeys business from Canada. However, from a guidance perspective, it hasn't changed significantly. We expect the total year impact of foreign exchange to be about 2% on total year sales.

Mimi Vaughn, Board Chair, President, and CEO

I will discuss the overall expectations for Journeys. Previously, we anticipated high single-digit growth because we believed there were significant sales opportunities missed in the latter part of the year. Currently, during this back-to-school season, we are projecting mid single-digit growth as we expect the consumer behavior to follow historical trends of less vigorous shopping in late September and October. However, we expect sales to increase again during the holiday season for Journeys, which keeps our initial expectations high. We are pleased with the current trends but have adjusted our forecasts to better reflect the actual performance we are observing.

Mitch Kummetz, Analyst

Okay. Thank you for that clarification. Good luck.

Mimi Vaughn, Board Chair, President, and CEO

Thank you.

Tom George, Chief Financial Officer

Thank you.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Mimi Vaughn, Board Chair, President, and CEO

Thank you for joining us. I wish everybody a great Labor Day weekend and look forward to talking to you on our next call.

Tom George, Chief Financial Officer

All right. Thank you.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.