Genesco Inc. lifted its full-year outlook after reporting a surprise profit in the second quarter. Same-store sales also came out ahead of expectations, led by a 4 percent gain by Journeys Group.
GAAP earnings from continuing operations per diluted share were 5 cents a share for the three months ended August 3, 2019, compared to $0.00 in the second quarter last year. Adjusted for the excluded items in both periods, the company reported second-quarter earnings from continuing operations per diluted share of 15 cents, compared to a loss from continuing operations per diluted share of 1 cent last year. Wall Street’s consensus target had been a loss of 1 cent.
Robert J. Dennis, Genesco chairman, president and chief executive officer, said, “We delivered second quarter consolidated results that exceeded expectations across the board. Our outperformance was driven primarily by the ongoing strength of our Journeys business, which continued to experience strong comparable sales even as year-over-year comparisons became more difficult. The second quarter marked the ninth consecutive quarter of positive consolidated comparable sales for our footwear businesses and included positive store and digital comps. At the same time, gross margins improved at each of our divisions, helping offset incremental marketing investments to achieve operating profit and earnings per share well above last year’s levels.
“The top-line momentum we experienced in the second quarter continued nicely in August with Journeys and Schuh leading the way during the important back-to-school selling season. Based on our strong second quarter results and positive start to the third quarter, combined with the repurchase of more shares than we initially expected, we are raising our full year guidance. We now expect earnings per share for Fiscal 2020 to be between $3.80 to $4.20, with an expectation that earnings for the year will be near the mid-point of the range, up from our previous range of $3.35 to $3.75. Our recent performance represents a great start to our first fiscal year as a footwear-focused company and we believe that the strategic course we have set for Genesco will result in improved profitability and increased shareholder value over the long-term.”
Second Quarter Review
Net sales for the second quarter of Fiscal 2020 were flat at $487 million compared to the second quarter of Fiscal 2019. Excluding the effect of lower exchange rates, net sales would have increased 1 percent. Comparable sales increased 3 percent, with stores up 1 percent and direct up 20 percent. Direct-to-consumer sales were 10.4 percent of total retail sales for the quarter, compared to 8.9 percent last year.
By concept, same-store sales grew 4 percent at Journeys Group against a gain of 10 percent last year. Schuh Group’s comps were flat versus a decline of 7 percent a year ago. Johnston & Murphy Group’s comps were up 1 percent against a gain of 7 percent last year.
Second-quarter gross margin this year was 48.6 percent, up 110 basis points, compared with 47.5 percent last year. The increase as a percentage of sales reflects freight claim credits for Journeys Group, improved wholesale gross margin in Johnston & Murphy Group and efficient sell-through of sale product at Schuh Group with lower markdowns.
Selling and administrative expense for the second quarter this year was 47.6 percent, up 30 basis points, compared to 47.3 percent of sales for the same period last year. The increase as a percentage of sales reflects increased marketing expenses, partially offset by decreased bonus expense and store rent.
Genesco’s GAAP operating income for the second quarter was $3.0 million, or 0.6 percent of sales this year, compared with $1.1 million, or 0.2 percent of sales last year. Adjusted for the excluded items in both periods, operating income for the second quarter was $4.7 million this year compared with $1.0 million last year. Adjusted operating margin was 1.0 percent of sales in the second quarter of Fiscal 2020 and 0.2 percent last year.
Income tax expense for the quarter was $1.9 million in Fiscal 2020 compared to essentially none last year. Adjusted income tax expense, reflecting excluded items, was $2.0 million in Fiscal 2020 compared to $0.2 million last year. The higher adjusted tax amount for this year reflects the inability to recognize a tax benefit for certain foreign losses.
GAAP earnings from continuing operations were $0.8 million in the second quarter of Fiscal 2020, compared to $0.0 million in the second quarter last year. Adjusted for the excluded items in both periods, second quarter earnings from continuing operations were $2.5 million, or $0.15 earnings per share, in Fiscal 2020, compared to a loss from continuing operations of ($0.2) million, or ($0.01)loss per share, last year.
Cash, Borrowings and Inventory
Cash and cash equivalents at August 3, 2019, were $58.0 million, compared with $49.8 million at August 4, 2018. Total debt at the end of the second quarter of Fiscal 2020 was $75.1 million compared with $83.3 million at the end of last year’s second quarter, a decrease of 10 percent. Inventories increased 2 percent in the second quarter of Fiscal 2020 on a year-over-year basis.
Capital Expenditures and Store Activity
For the second quarter, capital expenditures were $7 million, which consisted of $6 million related to store remodels and new stores and $1 million related to direct-to-consumer, omnichannel, information technology, distribution center and other projects. Depreciation and amortization was $12 million. During the quarter, the company opened two new stores and closed 12 stores. The company ended the quarter with 1,494 stores compared with 1,532 stores at the end of the second quarter last year, or a decrease of 2 percent. Square footage was down 2 percent on a year-over-year basis.
For the second quarter of Fiscal 2020, the company repurchased 1,610,705 shares for approximately $68.1 million at an average price of $42.29 per share, as part of a $100 million share repurchase program approved by the Board of Directors in May 2019. For the third quarter of Fiscal 2020 through last Friday, August 30, 2019, the company has repurchased 857,750 shares for approximately $30.0 million at an average price of $34.98 per share, which almost exhausts the current $100 million repurchase authorization.
Fiscal 2020 Outlook
For Fiscal 2020, the company now expects:
• Comparable sales to be up 2 percent to 3 percent, and
• Adjusted diluted earnings per share from continuing operations in the range of $3.80 to $4.20 with an expectation that earnings for the year will be near the mid-point of the range.
Previously, guidance called for:
- Comparable sales to be up 1 percent to 2 percent, and
- Adjusted diluted earnings per share from continuing operations in the range of $3.35 to $3.75 with an expectation that earnings for the year will be near the higher end of the range.
Photo courtesy Journeys