Genesco, Inc. had a strong net sales performance in the second quarter as its Journeys concept continues to dominate the fashion athletic footwear category in the mall. The specialty retailer also got a boost from a jump in sales at Hat World and from comps growth at Underground Station, though that divisions net sales declined due to store closures. However, a series of charges, including taxes on the gains from the failed merger deal with The Finish Line and discontinued operations, stopped the growth from flowing to the bottom line. Excluding one-time charges in both the 2008 and 2007 quarters, earnings from continuing operations were $3.6 million, or 18 cents per diluted share, for Q2 this year, compared to break-even earnings in the same period last year.
In discontinued operations, GCO recorded a $5.4 million, or 29 cents per share, charge due to an environmental liability from settlement negotiations with the EPA concerning the site of a former operation in New York in the 1960s.
For the Journeys group, comparable store sales increased 2% for the quarter. At Journeys stores, specifically, comps increased 2%, as well, after dropping 7% for the year-ago period. Overall for the quarter, footwear unit comps increased 2% and average selling price increased 2%. Excluding the Heelys business for both periods, Journeys overall average footwear selling price was up 4% for the quarter.
Management expects to benefit in the back half from not having to compare against Heelys numbers as sales for the brand had decreased 60% in the year-ago H2 period while also driving a margin well below the chains norm. The solid comp results were driven by ongoing strength in Journeys skate business, modestly offset by weakness in the women’s casual business. Men’s footwear made up approximately 56% of Journeys footwear sales for Q2 and women’s and kid’s footwear represented about 44%. The Journeys Direct business, which includes both the Internet and catalog businesses, was up 7% in the second quarter. Third quarter-to-date comps increased 9%.
Journeys Kidz comps decreased 2% in the quarter compared to a 5% decline last year and an 8% drop in the first quarter. The easier Heelys comparisons played a major part in the reversal. For Q3-to-date, Journeys Kidz comps are up 6%. In the second category footwear unit comps were down 3% and ASPs increased 2%. Excluding Heelys overall footwear ASPs were up 7%.
At the Shi by Journeys concept, second quarter comparable store sales increased 3% at the 29 stores in the comp base as average selling prices increased 8%. For the third quarter-to-date, comps have accelerated to be up 13%. On a conference call with analysts, management reported that the concept has added more athletic and womens brand footwear at higher price points. Currently, there are 52 Shi stores in operation with plans to open eight more before fiscal year-end.
Hat World comparable store sales rose 7% for the quarter against a decline of 2% for the second quarter of 2007. Comps accelerated from first quarter growth of 3%. Management noted on the call that comps were stronger at urban stores, rising 9%, than at non-urban, which grew 6% for the quarter. Hat World Internet sales jumped 23% for the quarter, while for the third quarter-to-date, comps are up 4%. Looking at product, MLB and action sports brands were called out as performing well. NFL was also said to be off to a strong start.
Overall Hat World’s operating margin expanded by 300 basis points during the quarter. Lids Kids, however, was a dark spot for the quarter. Though the concept has helped with expanding kids merchandise selection in the regular store to now account for 4% of sales, Lids Kids stores have not performed up to expectations.
GCO will not be expanding this store concept further and will be looking at each of the Lids Kids stores on a “case-by-case basis to determine their future.”
Underground Station provided another quarter of comp sales growth for Genesco as a refocusing of efforts on expanding selections of kids and womens product led to a 9% increase in comparable store sales for the second quarter following a 23% drop last year. The 9% increase for Q2 held steady to the 9% comps growth reported for the first quarter. Third quarter to date Underground Station comps are up 14%. For Q2, footwear unit comps rose 13% and ASPs declined 1%.
However, women’s ASPs jumped 17%. Women’s and kid’s footwear made up about 43% of Underground Station’s footwear unit sales and about 39% of its footwear dollar sales in the second quarter this year, up from 40% and 31%, respectively, last year. GCO plans to reduce the Underground Station store count to 174 by year-end compared to 192 last year. Though results are improving, management does not expect Underground Station to return to profitability until 2010.
Looking ahead, GCO raised its earnings outlook slightly to the range of $2.15 to $2.20 per share from earlier guidance of $2.09 to $2.19, based on comps growth in the low-single-digit range for the year.
