Earnings Call Transcript - GCO Q3 2021

Operator, Operator

Good day, everyone, and welcome to Genesco's Third Quarter Fiscal 2021 Conference Call. Just a reminder, today's call is being recorded. I will now turn the call over to Dave Slater, Vice President of FP&A and Investor Relations. Please go ahead, sir.

Dave Slater, Vice President of FP&A and Investor Relations

Good morning, everyone, and thank you for joining us to discuss our third quarter fiscal 2021 results. With me on the call today is Mimi Vaughn, our Board Chair, President, and Chief Executive Officer. 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, 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 the 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. We hope you're all staying safe and healthy. Now, I'd like to turn it over to Mimi to discuss the quarter and current outlook for the holiday season.

Mimi Vaughn, CEO

Thank you, Dave. Good morning, everyone. Thanks for joining us today. As we announced earlier this week, we are pleased to report that Tom George has been appointed Interim Chief Financial Officer of Genesco, replacing Mel Tucker who stepped down last month. Tom has almost 30 years of CFO experience and deep roots in brands and retail, most recently in footwear at Deckers Brands. We look forward to adding Tom’s valuable expertise to support the continued growth of our business and very much look forward to Tom joining our leadership team. Tom’s appointment is effective December 14th and in the interim I have assumed the responsibilities of Chief Financial Officer working closely with Dave, Brent Baxter, our Chief Accounting Officer, and Matt Johnson, our Treasurer, who together have formed the office of the CFO. These leaders and the rest of our talented finance team are ensuring that the transition will be seamless. I’m incredibly pleased with how well our organization performed during the third quarter, as we navigated through a back-to-school season like none other. It's a privilege to lead a team that is facing the challenges brought by COVID-19 head-on, serving our consumers extremely well through digital and omnichannel, making progress on our strategic initiatives and quickly returning the company to profitability. Through all this, we continue to operate with protocols to ensure our highest priority, the health and safety of our people and customers. As you'll hear today, Journeys and Schuh, our businesses serving teens and young adults which represent a large majority of our revenue, have both performed well under recent pressure. This speaks to the strong strategic market positions both concepts have built over time and their ability to capitalize on the accelerated shift to online spending. In today's channel-less world, where there are no barriers to shopping anywhere the consumer wants, Journeys and Schuh's recent performance underscores the tremendous loyalty they've developed with their customers and the compelling proposition they offer to new customers. Johnston & Murphy enjoys a strong strategic position with great heritage as well. However, the pandemic has hit J&M's dressier competitive space harder, extending the time frame for turning this business around. All-in-all, our teams executed with excellence, managing their businesses well as they reacted to rapidly changing dynamics during the quarter. In the U.S., there was nothing normal about the cadence of back-to-school. The selling season that's usually marked by a sharp acceleration in weekly sales starting in late July and running through Labor Day did not pack the punch that it usually does as school districts across the country delayed or suspended the return to in-person learning. As we expected, we did see an extension of the selling season through September and into October. However, in total, back-to-school was down year-over-year and was more heavily tilted to online. Meanwhile, back-to-school timing in the UK was consistent with historical patterns, but far more consumers shopped online for their school needs than ever before. Stores were open for about 95% of the possible days in the quarter compared to about 70% during the second quarter. While we continue to face traffic levels that are down well into the double digits, our store teams are driving record levels of consumer conversion that help to materially offset this headwind. Our online businesses, on the other hand, experienced strong gains in both traffic and conversion. We've said before that our e-commerce sales were nicely profitable prior to the pandemic, and as we reap the benefits of the many investments we've made, e-commerce is driving even greater profitability. New customers continued to deliver increased volumes as new website visitors were up almost 40%, driving an almost 60% increase in new customer purchases. The combination of these drivers led to a total revenue decrease of 11% year-over-year. This result was better than we expected, due mainly to stronger sales at Journeys, and represents a meaningful improvement from last quarter's 20% decline. The drop in store volume was partially offset by another strong quarter of digital growth with comps up over 60%. Thanks to decisive cost-cutting actions early in the outbreak, along with one-time benefits such as rent abatements, total expenses were down a little more than revenue. While gross margins were down compared to last year, due primarily to lower margins at J&M and a mix shift among our businesses, the drop improved sequentially from the second quarter as less promotional activity at Schuh was necessary and Journeys' gross margins increased. With sales and gross margin improving over last quarter, combined with increased profitability in our e-commerce channel, our bottom line swung solidly back into positive territory. The return to profitability fueled positive operating cash generation in the quarter. Equally encouraging was the health of our inventories, which were down more than 20%, allowing for fresh receipts of holiday merchandise. In addition, the significant effort we invested with our landlord partners seeking rent abatements during the time our stores were closed paid dividends and will bring even greater benefit next quarter. We appreciate our landlord partners’ willingness to find mutually beneficial solutions and hope to expeditiously reach conclusions with those discussions we have not yet concluded. So turning now to discuss each business in more detail. Journeys' third-quarter results are influenced heavily by back-to-school, with more than two-thirds of elementary, middle, and high school students attending school only virtually to begin the year, the quarter got off to a difficult start. Same-store sales were down double digits in August, although e-commerce remained strong. The business had an inflection point in early September as comparisons began to ease, accelerated significantly over the remainder of the month and remained strong in October as we captured our fair share of late back-to-school demand. While we were not able to fully make up for the lost volume in August, we were encouraged that store comps were nicely positive in both September and October, and e-commerce growth was even stronger than earlier in the quarter. Comfort continued to be the fashion choice of the pandemic, and Journeys' offering of casual products resonated strongly with consumers. While teens always have a big complement of fashion athletic footwear in their closets, when fashion swings toward non-athletic or what we call casual footwear, Journeys is especially well-positioned among its competition to deliver this assortment. This spring, a range of comfortable sandals and other casual products sold through well. This fall, our consumers' appetite for boots began early and more robustly in the season than we have seen in many years. While the casual part of Journeys' assortment has been gaining ground over fashion athletic all year, Q3 delivered the largest quarterly growth so far. These gains have been especially pronounced in women's and kids as we've seen throughout the year. On the other side of the Atlantic, back-to-school at Schuh unfolded similarly to previous years with schools starting on time and most students returning to in-person learning. However, in terms of consumer digital behavior, it was more extreme as significantly more back-to-school spending shifted online in the UK. With its best-in-class digital capabilities, Schuh was ideally positioned to capitalize on this digital shift and capture the vast majority of lost store volume through digital sales. E-commerce generated almost 45% of Schuh's sales in the quarter, even with most stores being open. While store traffic was still down considerably, back-to-school gave consumers a reason to shop and helped drive traffic increases to less negative levels. The blend of better store and much better online sales allowed Schuh to gain market share during the quarter. With positive comps in total and only a slight decline in year-over-year revenue from closed stores, coupled with cost savings, Schuh delivered a solid year-over-year operating profit increase, a noteworthy achievement under difficult conditions. With less competitive discounting pressure and more scarcity in the supply of the brands themselves, Schuh pulled back significantly on promotional activity versus the second quarter, which helped performance as well. Like Journeys, Schuh's casual assortment gained ground over its fashion athletic assortment, with boot sales driving a good portion of the pickup. While performance improved from the second to the third quarter with the introduction of its fall assortment, Johnston & Murphy continues to find itself in a tough environment. Its customer has fewer reasons to shop with many continuing to work from home and most large social gatherings and events postponed or canceled. In addition to store traffic being down over 50% for the quarter, some of J&M's airport and street locations have yet to reopen, which further impacted retail sales. A bright spot was boot sales, which began selling earlier in the season this year. While J&M historically has been known for its dressier products, the team initiated work years ago to evolve Johnston & Murphy into a full lifestyle brand with a range of footwear and apparel offerings from dressier to more casual. Highlighting the traction we've already made, casual and casual athletic represented about 60% of footwear during our last fiscal year, and apparel and accessories drove 40% of total sales. Looking forward to the coming year, J&M has focused 90% of new product development on the expansion of its casual offering to include casual athletic, leisure, rugged outdoor, and performance, which follows upon its highly successful reentry into Gulf this spring. Leading these efforts is the new Head of Product Development, who joined J&M earlier this year and brings a successful track record of developing casual brands. As the J&M customer returns to work and socializing, which we hope with the recent medical advances will be sooner than later, J&M's assortment will be ready for the post-pandemic lifestyle. So turning now to the current quarter. We believe we have the right assortments and are ready for this holiday season. That said, consumer demand has been very different this year due to the pandemic and its impact on consumer behavior and the economy, which has caused us to take a conservative approach to our outlook. In November, we faced headwinds from the reclosure of stores in North America and the UK as we carefully monitor and adhere to each country’s and region’s health requirements. As a result, we're closed for more than 10% of the possible operating days in the month. The biggest impact was in England and Ireland, where we had the best potential to make up some of these sales online, and most stores have reopened at this time. Following strong gains in September and October, sales moderated and November got off to a slower start against robust comparisons from the previous year. We were encouraged to see trends improve quite a bit around mid-month, providing the business with good momentum heading into Black Friday. For the Black Friday weekend itself, as expected, traffic was more subdued than usual. In spite of the choppiness, November sales were in line with our expectations with an even heavier mix of digital versus store sales. Unlike prior years, most retail venues and almost all of our stores were closed on Thanksgiving Day. The lion's share of the holiday season remains ahead of us. Outside of Cyber Week, digital sales are normally strongest during the earlier part of December. Our holiday store volume is typically concentrated in peak days and weeks between Thanksgiving and Christmas and builds as the month progresses. Whenever and however the consumer decides to shop, we believe we're set up well to meet the demand, thanks to investments we've made in technology to drive growth across e-commerce and in our stores. With recent investments across mobile, our platforms, our websites, and our distribution centers, we're prepared to handle what we anticipate will be record holiday digital volumes. We've helped the customer adjust to the pandemic online by introducing services like Klarna at Journeys this summer, which is a pay in four installments option that is driving much larger transaction sizes and offering technology on our website that helps customers determine what size is best to order. With the ability to fulfill online orders via our distribution centers or from any of our almost 1,500 store locations, we're well-positioned to meet the surge in demand. Earlier this year, we upgraded our inventory locating and order brokering system to provide greater inventory accuracy, which is critical during this peak sales period. This system also allows functionality such as tiering stores to protect inventory in our highest volume stores, enabling us to better optimize sales across our network. Even with the acceleration in online demand, the majority of holiday sales will still take place in our physical locations. Our stores become even greater strategic assets as we get closer to Christmas and customers don't want to risk online orders not arriving in time. This is the first year we'll have holiday comparison data in our workforce management system since we implemented it last year. This technology proved invaluable in managing the unusual traffic patterns during back-to-school and will enable us to rapidly add or remove labor to optimize store staffing levels during this unusual holiday season. Thanks in part to changes in our compensation programs this year, we've reduced turnover meaningfully and have a more tenured, more experienced workforce on our sales floor this holiday, ready to provide the excellent customer service we're known for. This holiday will be about execution, something we do well that will differentiate us among others. We've also developed some terrific marketing campaigns, adjusted for what we've learned during the pandemic to drive traffic and sales in this important holiday selling season. We've increased digital marketing spend substantially and are leveraging our CRM systems to inform our digital, social, and other advertising efforts. So thanks to our competitive strengths, we've navigated well through extraordinary market conditions this year, including back-to-school and back-to-work uncertainty, and we'll continue to navigate through this unusual holiday season. As conditions normalize and we make further progress on our strategic initiatives, I am confident we'll emerge strong and be well positioned with more than enough liquidity to take advantage of the many opportunities the pandemic has presented. To conclude now, I'd like to recognize and thank our employees across our company, especially those in our stores and field, in our call centers and distribution centers for your dedication, skill, and ingenuity. We appreciate your efforts all year round, but really especially in this busy holiday season in the midst of the pandemic when I'm certain you'll go the extra mile to delight our customers. I'm also so proud of the work our teams are doing in the communities we serve, including donating shoes and masks and supporting our diversity and inclusion initiatives. Finally, we wish you and your families happiness and good health this holiday season. And with that, I'll pass the call back over to Dave.

Dave Slater, Vice President of FP&A and Investor Relations

Thank you, Mimi. We were very pleased under the circumstances with our performance in Q3 and the return to profitability against the backdrop of the pandemic. Q3 sequential improvement compared to the prior two quarters in both revenue and gross margin, along with a lower tax rate and a small pickup in SG&A, drove results back to nicely positive levels with adjusted EPS of $0.85 compared to $1.33 last year. For the third quarter, ending cash was $115 million, with borrowings of $33 million for a net cash position of $82 million, just a little below second quarter's levels. We ended the quarter with $299 million of cash. During the quarter, operations generated $5 million while we spent $8 million on capital projects and paid down $178 million in borrowings, using $184 million in total. In addition, we continue to have outstanding rent payables as we remain in active negotiations with a number of our landlords. While the business environment continues to be fluid, we are confident we have adequate liquidity to navigate these challenging times and decided to pay down the majority of our revolver balances in both North America and the UK during the quarter. As a reminder, early this year, we increased our North American ABL borrowing capacity to $350 million. In Q3, we secured a new GBP19 million UK facility replacing an expiring one. Turning to the specifics of the quarter, consolidated revenue was $479 million, down 11% compared to last year, driven by lower back-to-school revenue, continued pressure at J&M, and the impact from store closures during the quarter. Robust e-commerce comp of 62% was offset by a decline in store revenue of 22%, driven by a comp decline of 18%, while our stores were closed for 5% of the possible operating days during the quarter. Digital sales increased to 21% of retail business from 11% last year. Our comp policy removes any stores that are closed for seven consecutive days. Therefore, we are providing both overall and comp sales by business for better insight into performance. Overall, sales were down 10% for Journeys with comp sales down 6%, while store traffic was down well into double digits. Much higher conversion and transaction size lifted Journeys comps. At Schuh, overall sales were down 3%, while sales were up 1%. At J&M, overall sales were down 45%, and comp sales were down 43%. At Licensed Brands, overall sales were up 91% due to the Togast acquisition. Consolidated gross margin was 47.1%, down 210 basis points from last year, with 100 basis points of which was related to J&M. Consistent with last quarter, increased shipping to fulfill direct sales pressured the gross margin rate in all of our businesses, totaling 50 basis points of the overall decline. Journeys' gross margin increased 110 basis points driven by lower markdowns. Schuh's gross margin decreased 320 basis points, more than half of which was due to increased e-comm shipping expense with the balance due to higher penetration of sale products. J&M's gross margin decrease of 1,370 basis points was due to more closeouts at wholesale, incremental inventory reserves, and higher markdowns at retail. Finally, the combination of lower revenue at J&M, typically our highest gross margin rate business, and the revenue growth of Licensed Brands, typically our lowest gross margin rate, negatively impacted the overall rate mix. Adjusted SG&A expenses were down 11%, and as a percentage of sales, leveraged 10 basis points to 44.1% as we realized the collective benefits of our organization's disciplined actions to manage expenses and relief from government programs. The largest year-over-year savings came from occupancy costs, driven in large part by the execution of $7 million of rent abatements with our landlord partners, who provided support for the times when stores were closed, and savings from the UK government programs, which provide property tax relief. The next largest areas of savings came from bonus expenses and the reduction in store selling salaries. Compensation expense benefited from reduced operating hours and government salary relief provided in Canada and the UK. Given the added cost of driving customer traffic to our stores and websites, our organization is intently focused on the strategic initiative of reshaping the cost structure. One of the most impactful areas has been a multi-year effort centered around occupancy costs, and we have achieved even greater traction this year in view of the pandemic. In addition to the rent abatement savings, we have negotiated 58 renewals year-to-date and achieved a 28% reduction in cash rent or 27% on a straight-line basis in the U.S. This was on top of an 11% cash rent reduction or 8% on a straight-line basis for 160 renewals last year. These renewals are for a shorter-term, averaging approximately 1.5 years compared to the 3-year average we saw last year. With almost a third of our fleet coming up for renewal in the next 24 months, we should make substantial progress here. In summary, the third quarter's adjusted operating income was $13.9 million versus last year's adjusted operating income of $26.7 million. Both Schuh and Licensed Brands generated operating income increases over last year, while Journeys was lower and J&M saw the largest year-over-year decline. Our adjusted non-GAAP tax rate for the third quarter was 4%, reflecting the impact of foreign jurisdictions for which no income taxes were recorded. Turning now to the balance sheet. Q3 total inventory was down 22% on sales that were down 11%. Journeys' inventory was down 28% on sales that were down 10%. Schuh's inventory was down 22% with sales that were down 8% on a constant currency basis. Both Journeys and Schuh will continue to chase inventory during Q4, adding fresh merchandise to increase these levels. J&M's inventory was down 3% on sales that were down 45%, reflecting the pack-and-hold inventory and the level of reserves we believe will be adequate to better right-size the current inventory levels. Capital expenditures were $8 million as our spend remains focused on digital and omnichannel, and depreciation and amortization was $11 million. We closed 7 stores and opened 7 during the quarter. Given the continued uncertainty due to the pandemic, we are not providing guidance this quarter but will share some current thoughts on the business going forward. Q4 revenue usually is dependent upon performing well during what are traditionally the peak volume times of the holiday season. This year, we are more conservative about those consumer peaks materializing. Therefore, thinking about revenue, the year-over-year percentage decline in overall sales in the fourth quarter could be just a bit more than the decline in the third quarter as a result of this. That said, if consumer demand is stronger during the peaks, we believe we are well-positioned to capture our fair share, which would result in us exceeding these levels. This does not contemplate any additional store closures or restrictions beyond what we know today, which could be a bigger headwind. For the month of November, stores were open for about 88% of the possible operating days, and currently, 97% of our stores are open. Stores have also been operating on more limited hours. Gross margin rates versus last year for Q4 should be in the range of the decrease we saw in Q3. The Q3 headwinds of higher e-commerce penetration, J&M gross margin pressure, and the negative impact from the mix of businesses we expect will persist into Q4. We expect SG&A in Q4 to leverage quite a bit from last year's levels as we continue to benefit from ongoing cost reduction efforts and get some substantial help from rent abatements. While the annual tax rate is expected to be approximately 18%, I'd like to highlight that in the fourth quarter, we expect it to be approximately 40%. In conclusion, I would like to echo Mimi's comments on our amazing team, who have executed so admirably throughout this entire year. From store closings and reopenings through an unprecedented back-to-school season and now in the middle of the most important holiday season, the talent and perseverance shown during this challenging year leaves me with much to be admired and appreciated. This completes our prepared remarks. At this time, I would like to turn the call back over to the operator for questions.

Operator, Operator

Our first question comes from the line of Steve Marotta with CL King.

Steve Marotta, Analyst

Congratulations on the perfect execution in the third quarter. I've got a couple of questions. And you've probably already incorporated this into what was the cursory fourth quarter guidance. But as far as increased shipping costs go during these peak weeks, can you talk a little bit about how that's affecting the margin, if you could potentially quantify that? Or maybe you're avoiding it in some fashion. If you could talk to that cost specifically, that would be helpful.

Mimi Vaughn, CEO

Yes. Let me begin by discussing our overall relationship since we have focused heavily on ensuring adequate shipping capacity. There has been much discussion regarding various retailers reaching capacity limits. We work with Federal Express, and we transitioned to this partnership several years ago, which has been very beneficial. We are not worried about reaching any limits. We outlined our expected volume early in the fall, and we have been performing well in that regard. While our shipping expenses have increased within our profit and loss statement due to our high digital penetration, we are also becoming more profitable because we are spreading the fixed costs of digital over a larger volume. In the last quarter, we more than doubled our e-commerce profitability because of this. We were already in a good position with positive e-commerce economics before the pandemic, and the pandemic has only improved our ability to generate profits from this channel. Dave, do you have anything to add?

Dave Slater, Vice President of FP&A and Investor Relations

Yes. I would say that we are not likely to quantify the expected impact in Q4, but it will definitely pressure our margin rate as we approach the holiday season.

Mimi Vaughn, CEO

Yes. It was 50 basis points in the third quarter. So we'll expect that the penetration quite be as high in the fourth quarter because penetration is usually higher anyway.

Steve Marotta, Analyst

That's very helpful. Looking ahead to the next back-to-school season, you mentioned that comfort and casual are performing well, which is a big surprise. Given how different this season is, is it possible to identify any changes or potential trends in consumer fashion preferences that could be relevant for next year and the upcoming back-to-school season? Or is there so much uncertainty that it's just not feasible?

Mimi Vaughn, CEO

Well, there's definitely a lot of noise, and I think that that's going to be the case for some time to come. I talked a bit about it in our prepared remarks that our teen is known for going through fashion cycles. And over the years, we've talked about lots of different fashion cycles from surf to skate to more gothic to you name it. And teens are constantly seeking something new. Our latest cycle that we've been talking about has been the retro athletic cycle, and that's been a terrific cycle because there are lots of brands that have fantastic silhouettes in their portfolios that they've been able to pull out. We saw earlier this year a bigger shift into casual and we really define our world in terms of fashion athletic and casual. And this year, we saw that sandals were really popular. Our kids are always wearing fashion athletic shoes. But the pandemic steered everybody to wear comfort and our teens found lots of nice products within the casual side of our assortment. We saw that not only in the summer, but we saw early boot sales in the fall. The combination of sandals and boots has put our casual as a percentage of our overall business at a much higher level. And so will that stick? We'll see. But typically, our teen consumers jump on a trend, stay on that trend for a bit. And we typically have a fairly good sense as to opportunity and upside. We see nice upside in that casual trend. Journeys and Schuh are both uniquely positioned among competition out there. We're in a great position where we can offer both fashion athletic and casual, and we will move toward whatever brands are most popular with our kids.

Operator, Operator

Next question is from the line of Janine Stichter with Jefferies.

Janine Stichter, Analyst

I wanted to ask a little bit more about digital. Maybe talk a little about some of the omnichannel investments you've been making over the years, and how those stand to benefit you for holiday? And then if you could just remind us by brand where your digital penetration fits and where you see the most opportunity?

Mimi Vaughn, CEO

We've seen significant success with our digital strategy this year, experiencing a 144% increase last quarter and over 60% this quarter. Over the past several years, our growth has been at a rate of 15%, but last year we aimed to accelerate digital growth, achieving a rate of 20%. Our investments have been diverse, focusing not only on front-end systems but also on essential tools to drive traffic and increase conversions. Infrastructure investments have included our order management systems and an upgrade to our inventory locating systems. Additionally, we have enhanced our distribution centers, making substantial investments in both the Journeys and Schuh's distribution centers. We implemented a custom e-commerce picking module in Journeys last year and plan to introduce another one in the upcoming fiscal year. Overall, our success in digital isn't attributed to a single factor but rather a comprehensive investment across multiple areas, with our teams dedicated to each aspect. Pre-pandemic, Schuh had a digital penetration of over 25%, which has now increased to nearly 50% this past quarter despite some store closures. Johnston & Murphy has shown similar trends, as their customers tend to prefer online shopping over visiting physical stores. Journeys is following closely behind. We have observed high growth rates among new customers in both Journeys and Schuh during the pandemic, indicating substantial opportunities in these segments.

Operator, Operator

Our next question is from the line of Jonathan Komp with Baird.

Jonathan Komp, Analyst

First, I just want to ask about the fourth quarter and the commentary you gave. When we think about the trends to date in November being in line with your expectations, is that signaling you're projecting forward a similar trend that you've seen in terms of top-line growth? Or are you expecting to change during the balance of the quarter?

Mimi Vaughn, CEO

Yes, we discussed this already, but we have observed some unusual behaviors. Typically, during the back-to-school season, we see early spikes that taper off in September. However, this year, we didn’t see those early spikes, but we did experience significant increases in September and October. Consumers are shopping more during the week compared to the weekend. During the week leading up to Black Friday, there was a considerable amount of shopping, but overall traffic was quieter, both in stores and on Cyber Monday, due to earlier shopping patterns. We anticipate similar trends throughout the holiday season, with peak days like the Saturday before Christmas and Black Friday. We expect those peaks won't be as high, but the lows will be filled in. When forecasting, we adjusted our expectations slightly downward for the peaks and increased the lows, which aligns closely with our third-quarter performance, hoping for more stores to remain open. Importantly, we expect online shopping to dominate, with increased in-store volumes as we approach Christmas. If consumers shop more actively during the peak days, we may exceed our expectations, but if the peaks remain subdued as anticipated, that will likely be our outcome. Dave, do you have any additional insights on this?

Dave Slater, Vice President of FP&A and Investor Relations

Yes. As Mimi indicated, November came in pretty close to where we thought it would be, and that included the impact of the COVID-related closures we saw mainly in the UK and Thanksgiving Day being closed in virtually all locations in the U.S. So we said that we would expect Q4 sales to decline just a little bit more than we saw in Q3, the 11% we saw in Q3. When I say a little bit more, I mean a couple of percentage points more. Our focus has really been around the peak days, and we're being conservative on the peaks. But if traffic comes in better during those peak times, then our sales will be better. So that's really our outlook right now.

Mimi Vaughn, CEO

And if we get stimulus, then that will be more than enough icing on the cake. There are lots of challenges but lots of opportunity in the coming holiday season.

Jonathan Komp, Analyst

Yes, that's really helpful. And maybe then a question on SG&A. Just it sounded like for the fourth quarter, you’re signaling more leverage potential even on potentially slightly greater sales declines. I just want to understand that. And maybe more broadly on the cost structure going into next year. I think it's helpful in your COVID-related adjustment table. In the press release, I think it calls out more than $20 million year-to-date of savings from property tax relief and rent abatements. And just want to ask how you're thinking about the ability to overcome that headwind next year that as presumably those costs come back in?

Mimi Vaughn, CEO

Great. Yes, why don't you start with the SG&A, and then maybe I'll jump in on the cost structure.

Dave Slater, Vice President of FP&A and Investor Relations

Yes, absolutely. To address your question about the COVID-related table and the relief related to property tax and rent abatements, I view rent abatements more as a timing issue rather than actual savings because we recorded full rent earlier in the year. Now we're realizing savings from the periods when our stores were closed. Once stores open next year, the economics should align properly. The UK property tax relief follows a similar pattern; we receive it because our stores were closed, and as they reopen next year, we should manage the costs as they return. Regarding SG&A and our expectations for leveraging in Q4, we are benefiting from the collective efforts we implemented early in the pandemic in relation to our cost structure. Many of these initiatives will continue into the fourth quarter. The largest opportunity appears to come from the rent abatements we are finalizing with many landlords, which could exceed double the $7 million recognized in Q3. We anticipate a significant leverage in our SG&A compared to last year's levels, even given the lower sales volumes we expect as a result. This could reach as high as 100 basis points, depending on our revenue for the quarter.

Mimi Vaughn, CEO

Yes. To add to the discussion about our cost structure and its adjustments, I think Dave did a great job highlighting the rent relief we've received beyond these abatements, which came through normal renegotiations. Jon, we've mentioned for several years that during renewals, we have seen rent reductions in the range of 8% to 10%. However, this has increased significantly during the pandemic, reflecting the fact that foot traffic has decreased, and we are needing to invest more in marketing to attract customers to our stores and website. This certainly supports our objectives. Regarding the growth of our cost structure, I believe the expansion of our e-commerce channel, along with its size and scale, will enhance profitability. While substantial upfront investment is necessary to grow e-commerce, increased size and scale lead to better economic outcomes. This, in combination with rent savings and reductions in store costs, should create a favorable economic situation.

Operator, Operator

The next question is from the line of Sam Poser with Susquehanna.

Sam Poser, Analyst

I have a few follow-up questions. You mentioned the digital penetration for Schuh, but I would like specific numbers for Journeys and Johnston & Murphy as well.

Mimi Vaughn, CEO

Yes, Johnston & Murphy had a digital penetration of around 20%, while Journeys was below 10% last year. This year, all our businesses have experienced higher digital penetration. Dave, perhaps you could share the numbers for the second and third quarters.

Dave Slater, Vice President of FP&A and Investor Relations

Yes. Due to the store closures during parts of this year, our digital penetration has significantly increased. In the third quarter, Journeys experienced nearly double the digital penetration compared to last year.

Sam Poser, Analyst

Could you just give us the numbers?

Dave Slater, Vice President of FP&A and Investor Relations

Yes. So last year, in Q3, the digital penetration at Journeys was 7%, and this year in Q3, it was nearly 14%. For Schuh, last year it was 24%, and this year it was 43%, so almost doubling. For Johnston & Murphy, last year it was 18%, and this year it was almost 34%. So big swings this year over last.

Sam Poser, Analyst

Those businesses experienced significant growth. Considering the revenue boost in digital sales and once the stores are fully reopened and customer traffic improves, how sustainable do you believe your e-commerce revenue will be?

Mimi Vaughn, CEO

We believe that consumers have engaged significantly with digital options this year and have enjoyed their experiences. I want to acknowledge our teams for their successful execution. For instance, Schuh's e-commerce penetration was 70% last quarter, while Journeys was at 20%. This level of performance, combined with high customer satisfaction scores, showcases our capabilities. We expect much of this growth to continue. However, we also recognize that teens prefer visiting our stores, which led to a decrease in digital penetration from the second to the third quarter. Consumers have various shopping options. Moving forward, we aim to provide excellent experiences in both our stores and online, allowing consumers to transition seamlessly between the two.

Operator, Operator

Our next question comes from the line of Mitch Kummetz with Pivotal Research.

Mitch Kummetz, Analyst

I have a few questions of my own. Let me start by welcoming Tom George if he's on the call or in the building; it's been a while. I want to begin with the outlook for the fourth quarter. You expect it to be down more than Q3, although it seems it might only be by a couple of points. I understand your comments about the peaks and valleys, but I'm curious if the primary reason for Q4 potentially being weaker than Q3 in terms of growth rate is due to fewer store open days in Q4 compared to Q3, or is it more about the peaks and valleys in relation to the differences between Q3?

Mimi Vaughn, CEO

Yes. I think there’s a lot happening in the overall environment. The consumer has remained strong this year, supported by multiple favorable factors. Consumers have been saving, which has given them disposable income. There are clear signs of this, although spending on travel, entertainment, and holiday parties has been limited. Our brands and footwear are highly sought after by teens during Christmas, making them popular gift choices. We are very optimistic that we have the right products and can perform well when traffic increases in our stores. Purchasers will have more time to shop as many are working from home. They can run out for shopping or use their mobile devices for online purchases. We are approaching this situation with some caution. Currently, 97% of our stores are open, whereas last month we were only operating 88% of the time due to store closures. December typically sees more shopping than November, and as long as our stores can remain open, we can accommodate the demand. We anticipate increased shopping on weekdays and during non-peak hours, as many malls have adjusted their hours to meet this demand. Many shoppers tend to wait until the last minute to make purchases, which means they will come into our stores at the last moment. We are remaining cautious due to the unusual consumer behavior during the pandemic. If consumers shop in larger numbers, we will be better positioned to handle those peak times, similar to our usual practices.

Mitch Kummetz, Analyst

And given the challenges around the peaks, especially to the extent that Europe's store capacity may be limited around some of those really big days, what are you dealing, if anything proactively, to kind of stretch that out and make the valleys better? I mean I know that some of that's just happening organically. But to what extent are you trying to steer that in order to soften the impact of the lower peaks? And then I have a final question.

Mimi Vaughn, CEO

Yes. Sure. So we are definitely using our promotional posture to steer the consumer into various times. For example, Journeys typically launches their sale, both in stores and online, the week of Black Friday, and it's a great opportunity to take advantage of traffic. In fact, they launched the week before this year and were really successful driving customers both to the stores and online, relieving some of the pressure on Black Friday weekend itself. Interestingly, we saw a nice pickup in volume prior to Black Friday. Black Friday weekend itself was more subdued. Of course, the stores were closed on Thanksgiving. We saw a nice pickup afterward. All of our marketing, messaging, all of retail marketing and messaging is about shop early, think about how to avoid the peak times, make sure you get your shopping in. We feel like people are going to be in a gift-giving spirit. It’s a nice relief from some of what has been the monotony of the pandemic. There may be some real opportunity here. The consumer is smart; they're figuring out when our less busy times are within the malls and shopping venues and will come in and will either pick up merchandise quickly without trying it on and take it home and try it on, or they will choose to try it on within our stores and purchase at that time. We've seen a lot higher conversion. Conversion has been at the highest levels we've seen. There's a lot of intent to purchase even with traffic down; we can have positive comps. In Journeys in both September and October, we had positive store comps, and that was on lower traffic because conversion was so strong and transaction size was better. You add all of that up, and you say that it's a combination where we can make the numbers work to be able to meet some of the volumes that we had last year.

Mitch Kummetz, Analyst

Okay. And finally, regarding boots, I recall you mentioned that the boot season started early this quarter. Since your boot sales are largely influenced by fashion trends, I'm interested to know if the strong performance in boots has persisted into November. It seems that November was relatively warm, and considering your boot business performed well in November last year, this could present a challenging comparison. How have you observed the boot sales as you entered the fourth quarter?

Mimi Vaughn, CEO

Yes, you've remembered well, Mitch. Boots began selling early and performed strongly. There are several major brands contributing to this. In the first few weeks of November last year, we experienced very cold weather, which led to a surge in boot sales. However, this November, the month started with a lot of events, including the election, and the weather was much warmer, resulting in various distractions. Overall customer traffic, as I mentioned, was somewhat weaker, but then we observed a significant rebound afterwards. I believe the strong interest among teens is primarily driven by fashion. They are looking for something new and a change with the seasons, and they really appreciate our product offerings. Many of our brands have introduced excellent merchandise, and we have a solid allocation of that merchandise, creating a winning situation.

Operator, Operator

At this time, we've reached the end of our question-and-answer session. Now I'll hand the call back to Mimi Vaughn for closing remarks.

Mimi Vaughn, CEO

Great. Thank you, everybody, for joining us today. We're wishing you really happy and really safe holidays.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation.