A strong retro athletic and lifestyle athletic boosted revenues at Journeys to offset a steep decline at Lids and help Genesco deliver fourth-quarter results in line with guidance.
In the quarter ended February 3, earnings excluding non-recurring items were $41.5 million, or $2.15 per share, about even with adjusted earnings of $41.8 million, or $2.15, for the fourth quarter of 2017.
Results reached the lower end of guidance, calling for earnings in the range of $2.07 and $2.37.
“Tremendous results in Journeys and Johnston & Murphy were offset by difficult comps in Lids, increased promotional activity in the UK and challenges in our licensed brands business,” said Robert Dennis, Genesco’s CEO, on a conference call with analysts.
Net earnings came to $56.3 million, or $2.91, compared $46.8 million, or $2.40. The latest year reflects a benefit of $19.8 million, or $1.02, from lower tax expense, partially offset by pre-tax charges of $7.5 million, or 26 cents, tied to licensing termination expenses and store impairment charges. The year-ago period benefited from a gain of $9.2 million, or 25 cents per share after tax, largely due to the sale of SureGrip Footwear that offset $3.9 million of asset impairment charges, pension settlement expenses and other items.
Sales in the quarter increased 5.3 percent to $930 million. Consolidated fourth quarter 2018 comps, including same store sales and comparable e-commerce and catalog sales, increased 1 percent.
For the year, earnings from continuing operations on an adjusted basis were $60.3 million, or $3.13 per diluted share, compared $87.2 million, or $4.33, for Fiscal 2017. Sales improved 1.3 percent to $2.91 billion.
Said Dennis, “While it was a very challenging year overall, the profit gap to last year improved sequentially each quarter and the gap closed in Q4. In spite of the notable changes in retail, our well-positioned businesses remain undisputed leaders in their categories and we believe they have much more potential than our results reflected this year.”
Dennis added, “The strength of our concept and compelling assortments have allowed us to largely maintain our topline, but we need to do more to bring those sales to the bottom line.”
At Journeys, revenues grew 15.9 percent in the quarter to $452.9 million. Operating income gained 28.8 percent to $46.5 million.
For the year, sales gained 6.2 percent to $1.33 billion. Operating earnings slid 11.4 percent to $76.1 million.
Comps grew from positive 4 percent in Q3 to positive 11 percent in Q4. The business performed well across every dimension, highlighted by year-over-year increases in traffic in the quarter, in conversion and in average ticket size. This was driven by both boots and higher-priced fashion athletic products and both footwear units’ and ASPs’ increase.
“With its exceptional talent and experience we were confident the Journeys team would deliver strong results as the year proceeded,” said Dennis. “After battling through the fashion rotation in the first half and in its usual pattern, Journeys built on the momentum of back-to-school and delivered a remarkable double-digit comp gain for Q4, a meaningful improvement over Q3’s positive result.”
He said cold weather “gave a boost” to Journeys’ boot business and the chain saw a “nice improvement” in select casual styles.
“Our current assortment, which is now more balanced and diversified across brands than in the previous fashion cycle, is performing above our expectations. We are enthusiastic about our prospect as the retro athletic and lifestyle athletic trends we have benefited from have proliferated into a greater number of brands and franchises, which will provide us the momentum through the year,” said Dennis. “This classic fashion lifestyle product plays into the sweet spot of Journeys positioning at the house of fashion routine footwear.”
At Lids, sales dropped 13.6 percent in the quarter to $241 million and operating income was down 58.3 percent to $8.4 million. Comps were down 14 percent. Traffic was down double-digits and conversion declined.
Q4 consolidated adjusted gross margins decreased 30 basis points to 47%. Without increased shipping and warehousing costs from higher e-commerce sales, gross margin would have been up 10 basis points.
Lids sales in the year fell 8.0 percent to $779.5 million. Operating earnings plunged 71.9 percent to $11.9 million.
Dennis said after Lids showed “significant recovery” in 2016, 2017 was more difficult than anticipated “due to several specific headwinds that we don’t believe will last forever.” While comps began into positive territory in the year, they became more challenging as the year progressed and saw a “notable” decline in the fourth quarter against strong 8 percent comps in the year-ago period.
Among the challenges was lapping against the impact of the World Series win a year ago on Cubs sales that boosted holiday gift-giving. Sales of NFL-licensed merchandise were also weaker than expected this season. While those two factors were largely responsible for the drop, the NCAA license business was down due to team specific wins and losses.
Finally, the absence of a strong headwear trend, which began over the summer, negatively affected the balance of sales. Notably, Lids’ e-commerce comps continued to be positive in the face of all these headwinds.
Comp declines were more heavily weighted to Locker Room, given its higher concentration in the NFL. On a positive note, dollars per transaction were 5% higher.
“Like our other businesses, Lids is subject to fashion cycles and headwear is currently between trends positioned now for the type of strong resurgence that Journeys is now enjoying once a new fashion driver emerges. But we don’t know the exact timing of when this will occur. History points to a rebound,” said Dennis.
Genesco recently announced its plan to explore the sale of Lids.
At Schuh Group, sales rose 16.3 percent in the quarter to $128.1 million. Operating profits were down 15.5 percent to $9.2 million. Comps were up 1 percent. In the year, sales advanced 8.2 percent to $403.7 million. Earnings were flat at $20.1 million against $20.5 million.
Dennis said Schuh, a chain similar to Journeys based in the U.K., which is based during the fourth quarter, was “hampered by weak demand of footwear and apparel which fueled an extremely promotional environment in the U.K. throughout the holiday selling season.”
At Johnston & Murphy Group, sales rose 12.5 percent to $92.4 million. Operating earnings improved to $9.4 million from $7.7 million. Comps were up 4 percent. In the year, sales at Johnston & Murphy were up 5.1 percent to $304.2 million. Operating earnings rose to $20.0 million form $19.7 million.
Looking ahead, Dennis said that while the company believes Journeys’ current product assortment is well-positioned to drive continued growth, the near-term uncertainty around the timing of a Lids rebound, combined with generally weak store traffic across retail, “causes us to be cautious about the coming year.” As such, Genesco is projecting adjusted EPS in the range of $3.05 and $3.45, which compares to $3.13.
“This was a wider range than we have given in the past, reflecting the many variables in the current retail and licensed sports environment, and we do regard our guidance as a range; something close to the middle reflects our best belief of where we might come out, with the top end representing more upside and the lower end upper scenario, all of which we see as real possibilities.
“Looking ahead, there are clear opportunities and challenges as we begin fiscal 2019 and we are addressing them head-on with a specific action plan. We remain confident that our footwear businesses represent a solid foundation to support future growth. At the same time, the ongoing evolution of consumer purchasing behavior requires changes to our operating model. These changes will focus on strengthening our customer connections and fortifying the leadership positions of each business in addition to streamlining our cost structure and capital spend.”
Photo courtesy Journeys
