Genesco Inc (NYSE: GCO) Q1 2021 Earnings Call Transcript

Genesco Inc (GCO) Q1 2021 earnings call dated Jun. 09, 2020

Corporate Participants:

David Slater — Vice President of Financial Planning & Analysis and Investor Relations

Mimi E. Vaughn — President and Chief Executive Officer

Mel Tucker — Senior Vice President, Chief Financial Officer

Analysts:

Steven Louis Marotta — CL King & Associates — Analyst

Janine M. Stichter — Jefferies — Analyst

Mitchel John Kummetz — Pivotal Research Group — Analyst

Samuel Marc Poser — Susquehanna Financial Group — Analyst

Jonathan Robert Komp — Robert W. Baird & Co. — Analyst

Presentation:

Operator

Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2021 Conference Call. [Operator Instructions]

I would now like to turn the call over to Dave Slater, Vice President of FP&A and Investor Relations. Please go ahead, sir.

David Slater — Vice President of Financial Planning & Analysis and Investor Relations

Thank you, Savannah. And good morning, everyone, and thank you for joining us this morning to discuss our first quarter fiscal 2021 results.

With me on the call today are Mimi Vaughn, our President and Chief Executive Officer, and Mel Tucker, our Chief Financial 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 filing, for some of the factors that could cause differences from 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.

Now I’d like to turn it over to Mimi.

Mimi E. Vaughn — President and Chief Executive Officer

Thank you, Dave. Good morning, everyone, and thank you for joining us today.

We hope each of you and your families are doing well and staying healthy. Much has changed in the world since we last spoke a few months ago as the COVID-19 pandemic has challenged Genesco and others in so many ways and as we strive to protect our people, our customers and our businesses. Before we begin, I’d like to thank the Genesco team for the incredible tenacity and resilience you have demonstrated during these extraordinary times. Throughout the crisis, our people have been resourceful and effective, working to best navigate our business through this pandemic.

Our Company began fiscal ’21 with positive momentum following 11 consecutive quarters of comp sales growth. Thanks to the work we did last year creating a footwear focused company and building on the turnaround in profitability that began in fiscal ’19, we entered the pandemic in a position of strength. Each of our businesses has a strong strategic position grounded in a deep and constantly evolving understanding of the customer it serves. The strength of our concepts and the competitive advantages we’ve built-in into leadership positions over time were evident as our customers actively sought to engage with us online while our stores were closed and as they have enthusiastically returned to our physical locations as we have reopened our stores.

Going back to where we left off at our fourth quarter call, the impact from COVID-19 at the time was limited to some softness in store traffic, primarily in tourist destinations in both the UK and North America and in airport stores. The situation changed quickly as the number of reported cases rapidly increased, resulting in the President declaring a national emergency and many states requiring non-essential businesses to close and individuals to shelter at home. To safeguard the health of our employees and customers and with their well-being foremost in our minds, we made the decision to temporarily close all North American stores beginning on March 18, and all UK locations beginning on March 23. We also closed our headquarters buildings in Nashville, Montreal and Scotland and began working remotely at that time.

With our principal source of revenue interrupted, we quickly went to work and took dramatic and swift actions to drive e-commerce, our remaining source of revenue, and to preserve liquidity and financial flexibility. We’ve more than doubled our e-com business over the last five years thanks to a variety of investments. We’ve had a real focus on mobile, we’ve made our website experiences better for navigation and checkout and we’ve invested in distribution center expansions with dedicated e-commerce fulfillment among many other investments.

We’ve been able to capitalize on these investments, driving significant gains in our digital business during the pandemic. In mid-March, we began executing specific actions to further drive e-com sale and enhance communications with our customers while stores were closed. We increased online advertising spend above the increase we already planned, investing in marketing channels that have historically had higher conversion rates. In addition, we strategically revised our social and other digital campaigns to reflect comfort, creativity and at home messaging while intentionally featuring lifestyle supporting social distancing. User generated content, positive messaging and creative campaigns reflecting quarantines resonated especially well with our teen and youth customers.

While we did experience a brief slowdown in digital sales from mid to late March as consumers stocked up on food and other necessities to weather a prolonged home confinement, trends picked back up in early April and continued to accelerate week over week, resulting in triple-digit e-commerce gains for the month and had almost 65% comp gain for the quarter. Close to 90% of Journeys’ e-com traffic came in over mobile, with a 65% conversion increase. Schuh’s advanced digital capabilities benefited it greatly as well, as there have been days when e-com sales alone have been higher than last year’s stores plus e-com sales combined.

What’s most exciting is the number of new visitors to our sites, representing nearly 50% of traffic in Q1. Not only are we attracting new customers and expanding our online shopper base, but we are also converting traditional in-store customers to digital buyers. In May, e-commerce sales increased considerably above April’s substantial level and we posted a 300 plus percent comp increase even as our stores were reopening. April delivered all-time records for e-com shipments, and in May we broke those records again. Our ability to process these volumes was made possible by the hard work of our DC team and the investments we’ve made in enhancing our fulfillment capabilities.

As pleased as we’ve been with e-com, the loss of store sales presented a tremendous economic challenge for our business. As such, the next area of significant focus was inventory. Knowing our stores would be closed for several weeks, our highly skilled and experienced merchant and product teams quickly turned to reducing any seasonal product they could, given a shorter spring-summer selling season, pushing out orders for core product that would be needed later and canceling select fall-winter merchandise orders that we anticipated wouldn’t be needed.

This was a very complicated undertaking, and our genuine thanks goes out to our team and our fantastic vendor and factory partners who have not only extended us additional payment terms but also, as they always have over the years, worked collaboratively and productively with us to adjust inventory levels to the reduced demand. As a result, inventory at the end of Q1 was up only 6% on a significant reduction in sales from store closures, and we have reduced receipts by several hundred million dollars going forward. The increase at quarter’s end was largely at Journeys, representing fresh product that should sell through as stores reopen.

Our attention turned also to managing expenses, tightening capital and controlling cash outflows. We made the decision to reduce our workforce by 90% across our stores, corporate offices and distribution and call centers, largely through extensive furloughs. We chose furloughs to give employees the confidence they were still employed by us and to facilitate a faster ramp-up when stores reopened. In addition, we implemented salary reductions for me, our executive team and select employees, while our Board volunteered to forgo their cash compensation during this difficult period. As a result of these and other decisive and some difficult actions across our P&L, we reduced expenses by 20% during the quarter.

At the same time, we’ve had productive conversations with our landlord partners regarding rent relief while stores were closed, along with discussions about rent structures as stores reopen, given our need for more flexibility due to the significant uncertainty ahead.

Finally, we cut capital spending by more than 50% for the coming year. We are moving forward with planned investments in digital and omnichannel strategic projects such as BOPUS and distribution center upgrades, which are vital to further building our capabilities. But we’ve halted other spending mostly associated with new real estate projects.

While we started the crisis in a positive cash position to ensure we had adequate liquidity, we borrowed a little over $200 million from our existing credit facilities and recently secured additional availability which Mel will discuss. We managed cash burn very well and at quarter’s end had $239 million of cash including these borrowings thanks to the extensive efforts I’ve described across the Company and our treatment of payables and rent. Overall, we remain confident we’re taking the necessary steps and working actively to maintain the cash position needed to navigate this pandemic.

On May 1, we shifted our focus and were excited to quickly begin reopening stores and welcoming customers back to serve them in our physical locations. We’re operating at reduced hours, adhering to CDC and other government and health authority guidelines where state and local officials have allowed malls to operate. As of today, we have opened more than 900 Journeys stores and more than 80 J&M stores, close to 1,000 stores in total. More than 70% of our stores are now open in North America and two-thirds of our fleet is open in total.

The health and well-being of our employees and customers remains our absolute priority, and our special task force teams have worked tirelessly to ensure the appropriate safety procedures and equipments are in place for our stores and headquarters. All stores are operating under enhanced measures, including requiring our employees to wear masks, providing hand sanitizer in multiple locations throughout the store, implementing enhanced cleaning and sanitation protocols, reconfiguring sales floors to promote physical distancing and modifying employee and customer interactions to limit contact. We will continue to reopen stores in a phased approach and where we believe we can work carefully under our enhanced measures to ensure the safety and the health of our people and customers. With the visibility we currently have, we’re anticipating reopening close to 85% of our stores on both sides of the Atlantic by the end of June and almost all stores by the end of July.

For the Journeys stores we’ve reopened, not surprisingly, we’ve experienced lower traffic; double-digit decreases compared to last year. Journeys, however, has been able to more than offset this headwind through significantly higher conversion and higher transaction size, comping nicely positive to last year so far in the stores that are open. Women’s and kids’ sales have been especially robust, and we’ve seen families shopping together to satisfy pent-up demand. All in all, we’re very encouraged by Journeys’ store performance post reopening. We’ve always known the Journeys customer enjoys the store experience and the exceptional service they receive in person, and it’s been tremendous to see the strength of the Journeys brand draw shoppers back in. To have opened as many stores as quickly as Journeys have done is a real testament to its operational abilities, and sales have benefited from this first mover advantage.

Conversion at the reopened Johnston & Murphy stores has also been much higher. The traffic has been slow, substantially slower than we’ve seen at Journeys. While traffic and sales have been improving each week, we believe the return to pre-virus levels will take some time as the J&M customer has remained largely on the sidelines due to the economic uncertainty brought on by the pandemic. Reopened store sales have been running at less than half of last year’s level so far, and while J&M historically enjoys a larger penetration of e-commerce sales, the gains during the quarantine have not been as pronounced as we’ve seen in our teen and youth businesses. As was the case prior to the pandemic, casual footwear and apparel continue to drive J&M sales as working from home and sheltering in place has temporarily reduced the need for dressier product.

With respect to Schuh, it’s too early for a read since only a few stores have been open for a few days. The UK has been slower to open than the US and is opening with a greater number of restrictions. June 15 is a key date when England allows stores to reopen, and we expect to have over two-thirds of our fleet up and running then. With best-in-class e-commerce capabilities, Schuh has been the most successful of our businesses capturing some of the lost store sales over the past two-plus months, albeit through heavy promotional activity to match the UK competition.

Like Journeys’, women’s and kids’ sales have been most brisk. So it’s important to note that we believe sales in May, typically a low volume month for us, are benefiting from a number of special factors, including pent-up demand, less competition while many stores remain closed, more free time as consumers are home during the week with kids out of school and consumer pending spending power which has been bolstered by stimulus money and enhanced unemployment benefits. We’ve also opened in areas least affected by the virus, so we will see where sales normalize once all stores are opened.

Regardless of the near-term volatility we may experience in the coming months, we remain confident in the strategic positioning of our businesses for the longer term. We aspire to create and curate leading footwear brands and to be the destination for our consumers’ favorite fashion footwear. Both Journeys and Schuh as houses of brands have demonstrated their vast consumer appeal during this crisis. J&M, along with Levi’s and our other licensed brands have unique and rich histories, and their longer-term success lies with the loyal customer bases they’ve built up over the years. There will be opportunities that arise out of this chaos and the retail consolidation that is following and our businesses are very well positioned to capitalize on them.

I began and would like to end my remarks today thanking our extraordinary team of people for their diligent efforts and perseverance, especially those who have been on the front lines in our stores and distribution centers. Times of great adversity like these highlight our greatest asset, our talented, experienced and highly committed people who adapted quickly, and with ingenuity and creativity are meeting the many challenges we face. This has made all the difference for our Company and has been inspiring to see unfold. Genesco team, I’m so proud of all that you’ve accomplished.

At the same time, we’ve made a real effort to take care of our community through activities like Journeys’ involvement in the Tennessee Emergency Management Agency’s COVID-19 response, J&M’s donation of thousands of masks to the local community resource center, the Schuh Trust’s GBP3 million donation to the National Emergencies Trust and the National Health Services charities and Licensed Brands’ shoe donation to local schools, healthcare workers and Soles4Souls. Our thanks also to our partners around the world who have extended great support to us.

And finally, during this time of pain and anguish in our country, all of us at Genesco stand with those fighting for the causes of equality and racial justice and we call on us all to help heal the divisiveness and to make progress in our communities.

And with that, I’ll turn the call over to Mel to give more insight into our performance and our financials.

Mel Tucker — Senior Vice President, Chief Financial Officer

Thanks, Mimi.

We are certainly in unprecedented times, but I also couldn’t be more proud of how the Genesco team members were conducting themselves in this very challenging environment. Little did we know during our prior earnings call on March 12 what lay ahead of us.

Fortunately, Genesco entered the COVID-19 global pandemic in a position of financial strength, with $81 million in cash at the start of the year and no North American borrowings. During the first quarter, we used $45 million to fund operating losses and for working capital purposes and spent $7 million on capital projects. We borrowed $208 million, leaving us with $239 million in cash on hand at quarter-end, benefiting from our treatment of payables and rent. To accomplish this, we strengthened our financial position by drawing upon existing lines of credit in the US and UK, extending payment terms and managing inventory by reducing future receipts by over $300 million at cost.

We carefully scrutinized all operating expenses, eliminating all non-essential spend. Planned capital expenditures for this year were reduced by approximately $35 million, with our expected spend now roughly at $30 million. We actively modeled multiple potential scenarios surrounding the length of store closures as well as various levels of sales performance once our stores reopened.

Further, we evaluated our cash burn rate under each scenario, given the uncertainty surrounding the reopening and recovery of the economy, to ensure we had ample liquidity. In order to further reinforce our balance sheet this month, we amended our ABL lending agreement, increasing the facility from $275 million to up to $350 million of borrowing capacity. With these improvements to our capital structure, we are even better positioned to navigate these turbulent times, and we do have options for additional liquidity should we need it.

Turning to the results from the first quarter. Given that stores were closed for the back half of the quarter, including the lead-up to the Easter holiday, net sales were down 44%. This precipitous drop in revenue led to an adjusted loss from continuing operations of $51.4 million or $3.65 per share compared to adjusted earnings of $5.9 million last year or $0.33 per share in what is typically a lower volume quarter.

Q1 consolidated revenue was $279 million compared to $496 million last year, driven by store closures, lower wholesale revenue, lower foreign currency exchange rates, offset partially by digital comp growth of 64%. We did not provide overall store comp results in Q1 as our comp policy removes any stores that are closed for seven consecutive days, and therefore we feel that overall sales is a more meaningful metric. By division, overall sales were down 48% at Journeys, 39% at Schuh and 48% at J&M while Licensed Brands’ overall sales were up 21% due to the Togast acquisition.

Moving to margin. In total, consolidated gross margin decreased 640 basis points to 43%. Higher shipping and warehouse expense, driven by large increases in e-commerce, accounted for 260 basis points of this decrease and affected all of our businesses. Schuh’s gross margin, which was down 1,230 basis points, was impacted the most due to its significant e-com business and a higher proportion of sell product given the heavily promotional environment in the UK. J&M’s gross margin also decreased due to increased markdown activity and was down 320 basis points. Journeys wasn’t very promotional but gross margins decreased 400 basis points due to higher e-com expense, plus an increase in inventory reserves.

Adjusted SG&A expense came in at $190 million, a 20% reduction in dollars compared to last year because of the proactive steps we took at the onset of the pandemic. A significant amount of savings resulted from the reduction in store selling salaries and wages in our corporate areas from the furloughs and salary reductions. Compensation expense also benefited from employee retention credits related to the CARES Act in the US as well as government relief provided in the UK and Canada.

Rent expense was lower in Q1, driven in part by property tax relief in the UK and the true-up of excess rents not likely to be incurred in fiscal ’21. All contract rent is included in our expenses per accounting requirements as we continue to negotiate with our landlords. For the quarter, there was no bonus expense compared to a meaningful amount due to a strong Q1 last year.

To add all this up, the first quarter’s adjusted operating loss was $69.5 million versus operating income of $8.4 million last year. We fully impaired Schuh’s goodwill related to the acquisition and partially impaired other trade names during the first quarter. These non-cash charges are included in GAAP earnings but removed from non-GAAP results. Our adjusted non-GAAP tax rate for the first quarter was 27%.

Turning to the balance sheet. Overall Q1 inventory was $392 million, a 6% increase or $24 million over last year on quarterly sales that were down 44%. Journeys’ inventory growth is the primary driver of the increase, up 14%. We see very little risk here as most of this inventory is core product. At Schuh, on a constant currency basis, inventory was down 11%. J&M’s inventory was down 8%. At the end of May, overall inventory was down 10% to last year thanks to the demand we’ve experienced since our stores reopened and May’s strong e-commerce results.

Due to the continued uncertainty, we are not providing guidance. But we’ll provide some thoughts on Q2, given our view at this time. Based upon the assumption that the opening schedule unfolds as Mimi described and that schools begin to open as usual in August, we expect that overall sales in Q2 should be higher than Q1. Our e-commerce business is off to a good start in May, but as more stores reopen, we would expect this strong performance to moderate. In Q2, we expect gross margin rates to be lower than Q1 with continued pressure from higher shipping and warehouse expense from the higher e-commerce sales, a heavier promotional environment and potential additional inventory reserves.

SG&A dollars in Q2 will be closer to the Q1 levels than the levels in Q2 last year but could vary depending upon our reopening cadence and store volumes. We expect to benefit from the same savings actions we did in Q1, but with some higher costs due to higher variable expense from operating stores.

We anticipate burning a good deal more cash in Q2 as the payables with extended terms come due, which will bring down our cash balance. Our wholesale customers have begun paying their past due invoices, which should add somewhat to cash, and we look forward to the remaining outstanding accounts catching up. We are planning inventory conservatively, but we will adjust accordingly as visibility increases.

The annual tax rate is expected to be approximately 28%.

In conclusion, I would like to thank our teams for their quick response and diligent efforts put forth in managing inventory, capital and SG&A, which has enabled us to maximize our liquidity as we successfully navigate these most challenging times. As we all endure this trying stretch together, we would like to wish everyone safety and good health.

This concludes our prepared remarks. At this time, I would like to turn the call back over to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] And we will take our first question from Steve Marotta with CL King & Associates. Please go ahead.

Steven Louis Marotta — CL King & Associates — Analyst

Good morning, Mimi and Mel. I have two questions. The first is, can you talk a little bit about the e-commerce activity in markets that have been reopened? And clearly, there is a balance of your stores that haven’t been reopened yet and I assume that e-commerce is strong in those. But how is the e-commerce activity specifically in markets that have been reopened, say in the second or third week?

Mimi E. Vaughn — President and Chief Executive Officer

Great. Steve, good to talk to you. Hope you are doing well. We were really satisfied with the way that our e-com performed over the course of the first quarter. At the end of March, consumers were shopping only to stock up for the quarantine, but in April our digital sales began to pick up pretty robustly. They grew stronger each week of April and it just exploded at the end of the month. There definitely was the impact of stimulus money on our e-com sales. That was the only channel that was available to our consumers largely to purchase in, but that really robust activity carried into May.

Recent bank account analysis says that the consumers spent half of their stimulus money in the first 10 days after getting it. It reminds us a lot of just tax money and tax refund money, it’s a real jolt into the overall economy. And so, it’s definitely a combination of stimulus and less ability to shop in stores that drove the high e-com volumes. But we took advantage of this. And look, we were able to process that volume thanks to some of the investments that we’ve made and our DC staff’s running and keeping the operations going.

That stimulus money, because of its impact in May as we’ve reopened stores, the rising tide lifted both sales in stores and online. And so it’s a little bit too early to tell definitively how e-commerce will settle out. We do expect that it’s going to moderate from our plus hundreds of percent level. But the consumer really liked the experience that they had shopping online. We converted a lot of consumers to shopping online, both who shopped in our stores before, and we got a lot of new customers. And so I think that that will bode well for higher levels of e-commerce going forward. We’ve been running at about a 20% level of growth and that’s stepped up from our historical levels of 15%, and I imagine that going forward, it will be even stronger than that.

Steven Louis Marotta — CL King & Associates — Analyst

That’s helpful. And one of the impediments to converting the Journeys customers as I recall in the past had been the fact that there is a fairly large percentage that purchase in cash in the store. Can you remind us what that percentage was last year or what percentage of sales within Journeys stores were cash and how you think that this pandemic may affect just that going forward and then how you can convert some of those customers online?

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. So, you are right that — you think about that teen customer and you think about the way that they interact with us. A lot of times, they will be working in a part-time job where they will get money from mom and dad or from their relatives and bring cash into the stores to buy their shoes. And we have seen in the past about 30% of our overall sales being done in cash. And certainly that wasn’t an option during the time that our stores were closed.

But interestingly, our teen customers figured it out. Whether they relied on debit card usage, we have enhanced the overall payment options that our customers can use online, whether it be PayPal, whether it be other ways to be able to pay in multiple segments. We adopted Klarna in the UK. We adopted Afterpay as the company that we’re using, even for Johnston & Murphy. And so there are more options for shopping online for the consumer.

And we expect that, going forward, the consumer may be more interested in things like contactless payments which we have the ability to transact with in our stores, and payment’s going to be just a really important place for focus for us both online and in stores. And we have enhanced and will continue to enhance our options so that the customer can interact with us however they like.

Operator

And we will take our next question from Janine Stichter from Jefferies. Please go ahead.

Janine M. Stichter — Jefferies — Analyst

Hey, good morning. Good morning, everyone. I just wanted to ask about inventory in the channel. It sounds like Journeys wasn’t too promotional in the first quarter but you’re expecting that to heat up a bit in 2Q. Could you talk a little bit about what you’re seeing just in terms of the inventory that’s out there, competitors, and how you think this might impact the promotional environment?

Mimi E. Vaughn — President and Chief Executive Officer

Sure. Hi, Janine. Good to talk to you. So, interestingly, every one of our businesses had a different promotional posture during the pandemic. Journeys started out being somewhat promotional online, but that was really just to match competitor discounting in the market, and I think that that was a bit of a knee-jerk reaction that, out of the gate a lot of people and brands who sell product that Journeys sell went to some pretty significant discounting early on. But that also came off pretty quickly.

And for the balance of the quarter and then also when our stores opened up, we haven’t been especially promotional. And I think that the consumer certainly has an appetite for sell product. We’ve seen some of that. We have seen that there is a little bit more economic sensitivity than there has been in the past clearly because of everything that’s happened. But we’re not anticipating needing to promote extensively within Journeys in order to clear merchandise. I think you may have heard what Mel said was that our inventory, actually in May, since our stores have opened up so robustly and online continued to be strong, was down 10%. So we don’t expect that we are going to have to promote in order to clear through our inventory.

There has been a difference between perhaps footwear and apparel. I think the consumer’s appetite for footwear has been stronger. It’s an easier purchase I think that perhaps some consumers are still just a little bit more cautious trying on apparel. But we’ll see. And I think that others who have reported on the footwear front have reported some pretty nice sales.

So, as long as sales move briskly and inventory doesn’t become a backlog in the channel, we’re going to respond to whatever we need to do to make sure that our inventories right-size, and we’ll think creatively about hitting the right sets of price points to satisfy the consumer appetite for better value and better sales.

Janine M. Stichter — Jefferies — Analyst

Okay. Great. And then, just as you go through your negotiations with your landlords, any changes in how you’re thinking about the long-term size of the fleet, just kind of given what you’re seeing with the migration online?

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. So I think you’ve got two questions in there. One is just negotiations with landlords and then overall size of the fleet. So, we spent a significant amount of effort during the last few months with our landlord partners. It’s been a key initiative since rent is the biggest expense item on our P&L outside of the cost of goods. We pay more rent per square foot because we believe we need to be in the right locations. It’s more than selling salaries.

And to define the rent discussions, the way we’ve been thinking about rent is that we are paying rent for traffic in shopping centers that will drive and generate sales. And the pandemic brought about two problems. One is that stores were closed and there was no way to generate sales. And then secondly, stores that are opening are opening on different schedules and there is a large variation in terms of how they’re performing; some are performing really well or average is good, but some are performing well below average. And that points to the need for rent relief while stores are closed, and also variable rent, how to share the risk and the uncertainty of how stores are going to perform going forward.

We’ve made some progress, mostly with smaller landlords. Some of the larger ones have just been waiting to understand the reopening better. In terms of how we think about the fleet, going into the pandemic, I think we’ve shared with you before that we perform well across A, B and C locations, and in fact our C locations are more profitable on a four-wall percentage basis than our A locations. Interestingly, our B and C locations have actually performed more strongly since they have reopened. All have been good, but B and C shoppers I think have fewer options and so they have been flocking back into malls.

So to say specifically how are we thinking about our fleet, we have been shrinking our square footage over the last few years. I think that that will continue. And the number of stores that we have open will be very highly dependent on the rent structures and the rent deals that we have in place. One of the really positive effects of store reopening is, we’ve seen huge productivity in our overall labor models, and we have been able to, with reduced store hours and also with much higher conversion, we have seen that we’ve gotten a lot of productivity out of our store force, and using things like workforce management and traffic counting has allowed us to manage that, really allowed our operations team to do a great job of managing that rent back up. And so selling salaries has been okay as far as the economics go, but it really is rent that is the highlight and that will dictate the number of stores that we will keep open.

Operator

And our next question will come from Mitch Kummetz with Pivotal Research. Please go ahead.

Mitchel John Kummetz — Pivotal Research Group — Analyst

Hi. Yes. Thanks for taking my questions. Hope you guys are well. Let me just start on Q to date. Is there any way you could quantify the performance through like the first five weeks of the quarter, either in terms of kind of a sales number and overall comp number?

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. So, look, Mitch, I think that it’s early days, right. We’ve just expended a whole lot of effort around opening up our stores. Let me give you a little bit more color. So Journeys, we’ve got about 80% of our fleet open right now. Traffic has been down a lot. I’d say it’s running down in the close to 20% range. I think that’s better than some of the numbers that I’ve seen on the mall on average.

That younger customer has just had a lot of appetite to come back into the mall. We’ve seen much higher conversion and higher transaction size. We’ve seen families shopping together; as I said, more multiple purchases. And we’ve seen, as we said, positive comps and nicely positive, I mean, even in the double-digit range. Stores tend to open up really strongly, and I think that’s the measure of pent-up demand. And then they’ll trend over time to more normalized levels.

Some of the other things that we’ve seen are, we’ve seen a change in just overall traffic patterns. Weekends are usually really good for us. We’ve actually seen stronger traffic on weekdays. Weekends were the ones that had the power hours, but now we’re seeing power hours during the week in the afternoons. People are coming to shop from 12:00 to 5:00 or 12:00 to 6:00. We’re also seeing some of our smaller markets perform well.

There have been some strong states. Interestingly, California and the Midwest to the South have been strong. Places like Ohio and Illinois, Indiana, Tennessee have been strong. The weaker states have been highly tourist destinations like Hawaii. Florida has been weak. Places like Orlando have been weak. Places like Miami have been weak. Texas has been flattish so far. So, we’re just — every day, every week, we’re observing where we are and we’re pleased with the Journeys’ performance in particular.

We’ve talked about Johnston & Murphy being a bit more slow to ramp up. I think the major difference has been the quantum of traffic, and Johnston & Murphy is seeing a lot less traffic than Journeys has been seeing; conversion is strong, but that customer’s mind is elsewhere right now. It’s on the pandemic, it’s on the economy, it’s on taking care of their family, and they’re working at home. So we’ve seen some pretty big differences in J&M and the reopening. But like the Great Recession, J&M has nine fantastic years on a run after absorbing the impact of the Great Recession. And we’re sure that that business will build strongly over time and get back to historical levels.

Mitchel John Kummetz — Pivotal Research Group — Analyst

Okay, Mimi. Thanks for that color. And then Mel, on Q2, I just want to hit on a couple of things that you mentioned. So I think you said sales higher than Q1, and I’m wondering why that would be. I think in the past, Q2-Q1 sales-wise look pretty similar. So, is that really a function of more stores open for more days in Q2 than in Q1? Or is there something else at play there? And then you kind of spoke to gross margin and SG&A, and I’m trying to understand whether or not in the second quarter you expect EBIT to be higher or lower than Q1.

Mel Tucker — Senior Vice President, Chief Financial Officer

So, with the Q2 sales, we expect them to be higher. And I think that’s really more a function of store count. If you look at the first quarter, we were closed pretty much half of the quarter, made up for some of that with e-com. And then if you look at where we are right now, roughly two-thirds of the stores are opened, with more stores opening, and we should be close to fully opened by the end of July.

So, as we continue to open stores, and they’re opening nicely as Mimi mentioned, with the Journeys stores comping up positive and e-commerce continuing to comp positive — we set a unit volume record in the month of April, only to exceed that in the month of May. So that’s more a function of just the timing of when our stores are opening and the fact that we’re going to have more store open days, and then the stores are opening very strong at Journeys.

Mimi E. Vaughn — President and Chief Executive Officer

Just to add one thing to that before Mel can talk about gross margin and SG&A, the way to think about it, Mitch, is, so I think that some of the demand we would have otherwise gotten in April — the end of March and April actually got pulled forward into the months of May and June, and we expect that that spring shopping that typically would have happened earlier is still going to happen in the second quarter as opposed to the first quarter.

And then just to talk a bit about gross margin and SG&A…

Mel Tucker — Senior Vice President, Chief Financial Officer

Yep. So on the margin line, we do expect margin will be a little lower in Q2 than it was in Q1. And really, this is a function of the fact that our e-com penetration is exceptionally high right now. Shipping and warehouse expenses run along with that. The variable cost structure in e-com is going to drive more cost in that regard, and that flows through the margin line. Also, in the UK, it’s been very promotional. It has continued for much of the quarter and we expect that will continue.

And then the last thing is, I think there’s going to be some pressure regarding inventory reserves, and it’s just math in terms of, if you look at how we value our inventory, I mean, looks at weeks of supply, and with the stores closed, some of those numbers have come up so we think there might be a few reserves that we might have to take in the second quarter. But at the end of the day, it’s going to be a little lower than what it was in the first quarter.

As it relates to SG&A dollars, we think that we’re probably going to be in line with Q1, but we’re probably going to be below Q2 dollars, and this is really just a function of us continuing to save on the things that we’ve saved previously. The biggest savings was in our selling salaries. We continue to save on the rent line with the UK property tax credits that we’re receiving per government relief, and we’re also going to save on percentage rent as well. So those lines will provide significant benefit. But at the end of the day, until the stores return to full volume, we’re still going to be running below last year’s level in terms of SG&A cost.

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. It’s pretty dynamic, though. I think that as you’ve heard, we’ve opened more stores, and part of the ability to save expenses during the first quarter as a result of just having our stores completely closed — so it’s really a dynamic relationship between how many stores we have open and operating and what our expense structure is. We’re working hard, in light of the lost sales for the course of the year, to manage expenses really carefully, and we’ll continue to do that through the course of the year.

Operator

[Operator Instructions] And we will take our next question from Sam Poser with Susquehanna. Please go ahead.

Samuel Marc Poser — Susquehanna Financial Group — Analyst

Thank you. Good morning. Hope everybody is well. I guess the first question I have is — and you haven’t talked about this, but can you give us some idea of what percent or how big the e-commerce business is right now? What percent of your sales it was in the first quarter by brand or by banner or in total, so we can have some idea — just to help us modeling and get some idea of at least some piece of the action we can review it more carefully?

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. Sam, hope you’re doing well too. The way to think about e-commerce and how big the business is, is that just the 64% comp in the first quarter, I think that looking at it as we traditionally have as a percentage of overall sales probably isn’t the right way to look at it these days just because so many stores were closed. The volumes are pretty astonishing in May, we talked about being up 300%. And I think that we’re going to sustain some of that level of increased volume. But, again, there is no question that stimulus money helped to propel those sales.

And so, last year, we were tracking to have e-commerce be about 15% of our overall retail sales this year. I think, again, those proportions might not be meaningful. But I think that, certainly last year we were growing our e-com business at 20%. In the first quarter, we grew at 64%. So I think the right way of thinking about that is somewhere between that 20% and 64% is where we’re going to end up being for the year.

Samuel Marc Poser — Susquehanna Financial Group — Analyst

I understand that. But I guess my question is, was e-commerce 15% of sales last year? Or in Q1, how much–

Mimi E. Vaughn — President and Chief Executive Officer

It was up 13% last year. We’ve got a lot of variation across the quarters because there is a lot higher penetration in the fourth quarter. And we anticipated that we would hit about 15% this year. And look, if sales were normalized, we’d grow at more than a 20% rate, which is what we were growing at prior to the pandemic. So store sales are going to be down a lot, Sam, so the denominator is going to be less. And I think what’s important is just to think about how much growth we’re going to get out of e-com in terms of dollars.

Samuel Marc Poser — Susquehanna Financial Group — Analyst

That’s what I’m trying to figure out. So could you tell us, by quarter of last year, what percent e-commerce was or what the e-commerce sales in dollars were by quarter last year so we can at least have something to work with, because the sorts of been closed?

Mimi E. Vaughn — President and Chief Executive Officer

Sure. So in terms of by quarter for last year — we’ll have to give you the specific numbers. I think altogether, as we said, e-com was about 13% last year. E-com is 50% higher in the fourth quarter. So I think you can back into the numbers for the first three quarters.

Operator

And we will take our next question from Jonathan Komp with Robert Baird. Please go ahead.

Jonathan Robert Komp — Robert W. Baird & Co. — Analyst

Yeah. Hi. Thank you. Maybe just one follow-up to the last question. I mean, if e-commerce, I know you said it was planned originally to be 15% of sales this year. If it were to go something much higher, 20%, 25% plus, could you maybe just talk about the margin implications of that, thinking about getting back towards 4%, 5% operating margin over time, how the e-commerce mix was going to impact that?

Mimi E. Vaughn — President and Chief Executive Officer

Sure. That’s a great question, Jon, because e-com definitely has a different set of economics than our stores do. And I think I’d start by saying that our digital business is profitable. We have typically run our e-com channel to be profitable, and I think that that is a result of traditionally not overspending on marketing just for the sense of driving sale. We also utilize other practices to ensure profitability like thresholds for free shipping.

E-com is a more profitable channel than stores based on the way that we do our allocations, and so we actually leverage the investments we’ve been making over a wider base of sales. If we go to 20% to 25% of sales, we will grow e-com profitability. And we saw that in the first quarter. We actually saw that as we looked at the financials from May as well that e-com is adding positively and profitably.

So it isn’t the case that for every e-com sale we make that we hurt profitability. The challenge for that is that we also need sales in stores because of the heavily fixed expense base. Our expense base of stores is about 70% fixed. And so, if all we did was grow e-com a lot more and held store sales constant, we would become more profitable, but with the loss of store sales, that’s really what ends up impacting the overall P&L.

Jonathan Robert Komp — Robert W. Baird & Co. — Analyst

Okay. That’s helpful. Maybe just one follow-up to that, Mimi. As you kind of get past the period now where there is maybe a lot of natural traffic moving towards online, do you have any view on the competition and the cost to drive the online traffic, what might happen?

Mimi E. Vaughn — President and Chief Executive Officer

Yeah. Well, your point’s a good point, plus a good question, because we were seeing that the cost of certainly new customer acquisitions and even paid search was going up pretty significantly. And part of what we saw during the pandemic is that while we increased our ad spending, net return on the ad spending was very strong, and I think that with more people interested in shopping online, then your spending dollars, even if you were spending the same amount, would become more effective because there’s more opportunity to be able to drive sales.

Look, I think that, as in anything else, that things tend to normalize. I think that some customers will convert permanently to shopping e-com. I think that we’ve probably accelerated the trends that we were seeing by two to three years. And so I think that what we’ll end up normalizing is that paid search cost will end up normalizing to the new level. I would hope we will continue to see some of the increases in productivity, at least for the time being.

Jonathan Robert Komp — Robert W. Baird & Co. — Analyst

Okay. That’s really helpful. Just last one for me. On J&M, could you just maybe remind us how much today you’d say is the more casual styles versus more traditional and just how you see kind of the current trends with consumers being at home playing out for that brand and what you’re doing?

Mimi E. Vaughn — President and Chief Executive Officer

Sure. I think that you know that J&M has traditionally been known as a dress resource, but over the last 10 years, we have done a — the J&M team has done a tremendous job of not only proliferating the footwear styles into more casual product but also selling a lot of apparel and accessories. And what we have seen most recently is that the dress shoe business has been declining, and that’s because consumers have really liked some of the hybrid products that we have put out there with the athletic bottoms but the more dressy uppers. And so, the growth that we have seen have been around casual and dress casual.

Dress footwear is proportionately a lot less than our casual and dress casual today. If you look at our overall assortment, casual footwear by far have the largest penetration in the first quarter, followed by dress casual and then dress footwear after that. And so our penetration of dress footwear is just — or percentage has come down over time. And so we have less exposure to the dress category than we had in the past.

In terms of consumers being at home and how is that going to play out for fashion, I mean, we definitely have seen that it’s comfortable to be at home, that we’ve seen some nice responses online to certainly anything related to comfort. We have a tremendous assortment of shirts. You’re having to dress up your top and not necessarily bottom, so we have a tremendous assortment of shirts in our spring line, both conversational prints or knits, have performed really well. And so that has been what has been driving our business for now.

A lot of folks are sitting at home in their slippers or — and no issues at all, but over time, again, we expect that as people get back to work, as people get back to more normal lifestyle, the J&M customers potentially will shift back into purchasing footwear, and I expect that, again, as in everything else, that these trends that we’ve been seeing will accelerate. So I anticipate that after the pandemic, our casual assortment will skew even more in the casual direction.

Operator

And our next question will be a follow-up from Mitch Kummetz with Pivotal Research. Please go ahead.

Mitchel John Kummetz — Pivotal Research Group — Analyst

Yeah. Thanks. I’ve got a couple of follow-ups. So first off, I just want to drill down on the inventory a little bit. I was hoping maybe you could speak to — I don’t know if you could give like a percentage of what you’re holding that’s seasonal, specifically sandals? Do you see any excess within kind of that business? I know, Mimi, you said, kind of maybe what didn’t sell in Q1 will sell in Q2. But I’m wondering if there is any concern about sandals and how are you thinking about any excess there in terms of liquidating versus maybe carrying it over if it doesn’t sell.

And then, also on the inventory, how are you guys thinking about kind of the seasonal side of your business for the back half? Are you concerned about a potential second wave and maybe potentially getting caught with some excess boots and so you’re maybe planning that side of the business conservatively versus things that are more sort of core basic? So just that on the inventory. Then I had another one.

Mimi E. Vaughn — President and Chief Executive Officer

Okay. Great. So, to speak to the percentage of inventory that is seasonal, I think about it more as the seasonal product in the spring and the summer is more of the icing on the cake. We sell a lot of core product during the course of the spring and the summer, a lot of athletic product. I mean, our kids live in athletic shoes year-round, and so that’s a big part of the assortment.

Having said that, Journeys had a really nice sandal package. And sandals have been driving sales. The customer is really taken with some branded sandals, and that seasonal assortment that Journeys put together was just really terrific, of some fashion product. And so, we are not worried about liquidating our sandal inventory and the stores are opening up, that’s some of what we’re seeing as far as sales being risk around sandals. As far as seasonal inventory for the back half of the year, we sell boots in the back half. And so whether you want to call it seasonal or not, I think we think of boots as fashion. We continue to sell athletic year-round. So we’ll continue to carry some of our athletic assortment well into the back part of the year.

And on boots, clearly, I think that we’re going to learn a lot more. Our merchant teams have been able to adjust really phenomenally to the differences in demand. They took down receipts pretty quickly when we thought demand would be less, and they are in the process of ramping it back up to prepare for back-to-school as we’ve opened more strongly than we thought.

So we will — we’ve placed our boot purchases and we will adjust those purchases as we get more visibility over the course of the next few weeks and months. And I think we’ll learn a lot more and we’ll have a lot more insight, and we anticipate that there will be more inventory available in the channel. We’ve gotten access to product both in Journeys and in shoe that we wouldn’t otherwise get because people haven’t taken their full allocation. And so, we think that we’ll have a lot of good flexibility to be able to do what we need to do in response to holiday and to Christmas buying.

Operator

And that will conclude today’s question-and-answer session. So I would like to turn the call back to Mimi Vaughn for any additional or closing remarks.

Mimi E. Vaughn — President and Chief Executive Officer

Thank you for joining us today. We hope everybody stays healthy and safe, and look forward to talking to you again in a few months, if not before.

Operator

[Operator Closing Remarks]